Indian Banks Face Margin Pressure as Loan Growth Outpaces Deposits

Indian banks are grappling with a growing mismatch between credit and deposit growth, with systemic loan expansion at 16% outpacing deposit growth at 12.3%, forcing lenders to rely on costlier funding sources and compressing net interest margins. Despite robust credit demand, rising deposit costs and a shrinking share of low-cost current and savings account (CASA) deposits are undermining profitability, top bank officials confirmed in recent earnings calls.

SBI Chairman CS Setty said the bank is adapting to changing savings patterns as households shift money into equities, mutual funds, gold, and real estate, noting that SBI's net interest income rose just 4% despite double-digit credit growth. Bank of India CEO Rajneesh Karnatak described a structural shift in deposit composition, with funds flowing out of the banking system and intensifying competition among lenders to finance loan growth.

To cover the funding gap, banks are increasingly turning to retail term deposits, with SBI and Bank of Baroda reporting term deposit growth of 14.7% and 14.8%, respectively, but higher rates on these deposits are raising the overall cost of funds. Bank of Baroda MD Debadatta Chand said deposit pricing remains elevated due to tight liquidity, and rates are likely to stay sticky unless liquidity conditions improve.

Regulators and bank executives expect the pressure on margins to persist in the near term as deposit growth fails to catch up with credit demand, and banks recalibrate liability strategies to attract stable, low-cost funds. The Reserve Bank of India and banking leaders will continue monitoring funding patterns and interest rate trends in upcoming policy and earnings reviews.