Loan growth ambitions push Indian banks to ‘deposit war’

Loan growth is expected to fall in 2025 with possible intensified deposit competition.

With a strong credit demand and a promising economic backdrop, you’d think that India’s lending growth would be promising. The problem? A lack of deposits.

More precisely, Indian banks are missing a much-needed boom in deposits,which may lead to intensified competition that will squeeze banks’ margins, reports S&P Global Ratings in a commentary. This is leading to a constrained loan growth for many banks in the country, it said.

“Credit demand is strong. The economic backdrop is highly conducive to growth. Asset quality is improving, buoyed by a confluence of supportive structural and cyclical factors. All that India's banks are missing is a boom in deposits,” S&P wrote.

System level credit growth is expected to moderate to 14% in 2025, actually falling from a 16% growth expected for the first three quarters of 2024. Margins are also set to fall.

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"If credit and deposit growth rates remain steady, a period of deposit competition looms, squeezing bank margins to 2.9% from 3%. Private-sector banks are likely to bear the brunt of the situation, as they are already operating at much higher LDRs," said S&P credit analyst Deepali V Seth Chhabria. 

If lenders don’t pull back on the bid for credit growth, deposit competition could get fiercer. 

"Private banks' LDR could cross 97% by March 2026 in our alternate scenario of 18% credit growth. The hit to net interest margins for the system could double in this scenario, falling 20 basis points to 2.8%, and this could translate into a 10-15 basis point impact on the return on average assets," warned S&P Global Ratings credit analyst Geeta Chugh.

A surge in credit growth has pushed Indian banks' ratio of loans to deposits to a two-decade high; growth beyond this level will either come more slowly or be more expensive, the analysts added.