Loan books expand faster than deposits at major banks in Q1 FY27

By: Team India Tracker

Strong credit growth is helping sustain domestic demand, but unless deposits catch up, funding pressures may eventually slow lending

Banks have entered the new financial year with a familiar problem: loans are growing faster than deposits. Business updates for the April-June quarter show that credit demand remains robust across both public and private sector lenders, even as deposit mobilisation continues to lag. That is good news for an economy that still relies heavily on bank financing to support consumption, small businesses and corporate investment. But it also highlights a growing funding challenge that could keep borrowing costs elevated despite expectations of lower interest rates.

The pattern is visible across almost every bank that has released provisional numbers.

Among large state-owned lenders, Punjab National Bank reported domestic advances of Rs 12.06 lakh crore, up 11.74% from a year earlier. Domestic deposits grew a slower 8.63% to Rs 16.70 lakh crore.

Bank of Baroda’s domestic loan book expanded 16.14% year-on-year to Rs 11.51 lakh crore, while deposits rose 14.74% to Rs 13.82 lakh crore.

Bank of India posted 19.12% growth in domestic advances to Rs 12.06 lakh crore, compared with 16.17% growth in deposits to Rs 8.25 lakh crore.

UCO Bank reported one of the strongest performances among public sector banks. Domestic advances increased 22.5% to Rs 2.45 lakh crore, while deposits rose only 12.14% to Rs 3 lakh crore.

Private-sector lenders painted a similar picture.

J&K Bank reported 25.5% growth in advances to Rs 1.31 lakh crore, while deposits increased 16.75% to Rs 1.73 lakh crore.

South Indian Bank expanded advances by 17.01% to Rs 1.04 lakh crore, compared with 11.39% growth in deposits to Rs 1.26 lakh crore.

Tamilnad Mercantile Bank recorded one of the fastest loan growth rates, with advances rising 27.01% to Rs 57,306 crore. Deposits grew 19.71% to Rs 64,409 crore.

Dhanlaxmi Bank also reported strong credit expansion. Advances increased 26.47% to Rs 15,785 crore, while deposits grew 17.1% to Rs 19,403 crore.

Among small finance banks, Ujjivan Small Finance Bank reported 28.9% growth in advances to Rs 42,903 crore, with deposits up 25.1% to Rs 48,307 crore. CSB Bank posted 24% loan growth to Rs 40,866 crore, while deposits increased 26% to Rs 45,415 crore, making it one of the few lenders where deposit growth broadly kept pace with lending.

Taken together, the numbers point to an economy where credit demand remains healthy despite an uncertain global backdrop. Households continue to borrow, companies are expanding, and banks are finding enough demand to grow their loan books at double-digit rates.

That is encouraging because bank lending remains the main source of finance for much of India’s economy. Strong credit growth usually reflects confidence among consumers and businesses and supports investment, production and employment.

Yet the same figures expose a structural weakness.

Banks cannot keep expanding loans much faster than deposits indefinitely. Deposits are the cheapest and most stable source of funding. If they grow too slowly, lenders must compete harder for household savings by offering higher deposit rates or rely more on wholesale borrowing, which is generally more expensive and volatile.

That creates pressure on profitability.

It also complicates monetary policy. Even if the Reserve Bank of India cuts interest rates further, banks facing funding constraints may not fully pass on lower borrowing costs to customers because deposit rates remain sticky.

Competition for deposits has already intensified over the past two years as savers shifted money towards mutual funds and other investment products offering higher returns. Banks have responded by raising deposit rates, but credit demand has continued to outpace funding growth.

The latest quarterly numbers suggest that imbalance has not disappeared.

For the broader economy, the picture is mixed. Strong loan growth signals that domestic demand remains resilient, helping offset weakness in global trade and exports. At the same time, persistent funding pressure could eventually slow the pace of lending if deposit growth does not improve.

For now, the banking system continues to support economic growth. But sustaining that momentum will require more than strong credit demand. Banks will also need to convince households to save with them fast enough to finance the next phase of lending. In India’s credit-driven economy, deposits remain the fuel that keeps the engine running.