Rate Race Enters Next Phase Of Banking Cycle

Mumbai: Credit and deposit growths are likely to unite after 5 fiscals with the liquidity pump aiding deposits, says a study by SBI Caps. Credit growth exceeded deposit growth for four consecutive fiscals through FY25, only the second such occurrence in the past 50 years. However, the gap is gradually narrowing and the two may converge in FY26. This shift would be supported by surplus liquidity, which has historically fuelled deposits more than credit. As we expect nominal GDP growth closer to 9 per cent, credit and deposit growth are expected to be around 10-12 per cent, it adds.

Speaking to Bizz Buzz, Shiva Kumar, former MD, State Bank of Bikaner & Jaipur, says: “Historically, deposits grew faster than advances. With not so happy experience with mutual funds in recent months, real estate prices stabilising and gold prices having reached a new peak, those days look back again. FY26 should see a greater increase in deposits compared to advances.”

Industry credit growth remained a weak spot in FY25, expanding at just 8 per cent, weighed down by structural shifts in the economy. The outlook for FY26 appears equally subdued, with the NSO projecting a 26 per cent contraction in private capex.

For the first time in several years, the share of bank loans in NBFC liabilities has declined, indicating increased funding diversification — particularly among highly rated NBFCs, which have benefited from access to lower-cost bond markets. In contrast, lower-rated NBFCs are likely to remain reliant on bank financing.

Meanwhile, the RBI’s draft guidelines aimed at expanding the co-lending framework are expected to support credit flow to the MSME sector. On a brighter note, personal loans are expected to be a key driver of credit growth, supported by the easing of regulatory restrictions on select unsecured segments. Further tailwinds may come from potential direct tax relief in the Union Budget, ample system liquidity, and a declining interest rate environment — all of which could stimulate retail borrowing.

Deposit growth reverting to long-term mean as C/D scramble eases and competitive dynamics of rates is changing. Amid deposit pressures in FY25, many banks turned to alternative funding channels, issuing nearly Rs1 trn in infrastructure bonds and actively tapping the certificates of deposit (CD) market.