Banks’ deposit growth picks up pace in Q1 even as credit growth remains sluggish

Mumbai: Deposit growth at banks picked up pace in the first quarter of the current financial year, even as credit growth continued to be sluggish, initial business updates show.

Of the lenders that have declared their initial Q1 updates so far, on-year deposit growth matched or outpaced loan growth for most private banks and Punjab National Bank, growing 8-16% for commercial banks and 19-31% for small finance banks.

On the other hand, loans grew 5-15% for most banks and 11-18% for small finance banks. In Q4, on-year loan growth for most large banks was in the range of 12-22%.

YES Bank and CSB Bank were the outliers in Q1 FY26. YES Bank saw muted growth for both loan and deposits, with loans growing 5% and deposits 4%. CSB Bank saw loans growing 32% on year and deposits at 20%.

However, public sector banks such as Bank of Baroda, Bank of India, Indian Bank and Bank of Maharashtra–which have largely been comfortable on deposit mobilization over the past year–saw on-year growth in loans outpacing deposits. Loan growth for these lenders was in the range of 11-14% whereas deposits were 8-10% higher on year.

Typically, the first quarter of a financial year sees slower loan and deposit growth for lenders, due to cyclical factors and the large base in Q4–where growth tends to be higher. However, Q4 FY25 was a weak quarter for banks because of a significant slowdown in unsecured and small ticket retail lending owing to concerns around rising stress. Q4 also saw sector-wide issues in microfinance portfolios.

Margin pressure to continue

Banks are also likely to have gone slower on lending in Q1–a strategy continued from Q4 FY25–as they braced for the impact of the successive rate cuts by the Reserve Bank of India and tried to minimize the impact on their margins.

“Q1 FY26 is set to be a tough quarter for banks. The market largely expects results to be weak across the space. We expect NIM (net interest margin) compression of 10-15 basis points for banks,” Macquarie Research said in a note dated 2 July.

“System loans and deposits data suggest QoQ numbers so far have been flat. On a YoY basis, system loan growth has been sub-10% and deposit growth a tad above 10%. Hence, we expect loan growth to be weak YoY,” the note said.

RBI cut the key policy rate by 25 bps each in February and April. This was followed by a 50-bps cut in June, leading to a sharp 100 bps drop in rates within five months.

Given that banks are required to price all floating rate retail and MSME loans as per an external benchmark–typically the policy repo rate–transmission of rate cuts is usually faster on the lending side compared with deposit rates which take 3-6 months to reprice. Around 40% of bank loans are estimated to be linked to the external benchmark. This has led to pressure on banks’ margins as their average yield on advances drops faster than the overall cost of funds.

On the other hand, surplus liquidity in the banking system is Q1 FY26 is also expected to have aided deposit flows for banks as amid a falling rate scenario, money market rates tend to fall faster than deposit rates, nudging savers to shift their funds from alternative investments to short-term deposits.

HDFC Bank

The country’s largest private sector lender, HDFC Bank, saw its advances grow 6.7% in Q1 and deposits grow much faster at 16.2%. The bank has been consciously growing loans slower than deposits to improve its credit-deposit (CD) ratio, which took a hit following the merger of erstwhile parent HDFC Ltd with the bank. The CD ratio or loan-to-deposit ratio (LDR) of the bank declined from 96.5% in Q4 FY25 to 95.1% in Q1 FY26, a sequential improvement of 140 bps.

The bank had previously said that while its loans grew slower than the industry in FY25, they should grow largely in tandem with the sector in FY26 before outpacing sector growth in FY27, allowing the bank to start gaining market share FY27 onwards.

“HDFC Bank’s deposit growth outpaced system deposit growth by 500-600 bps, an impressive achievement for a bank of its size,” Macquarie Research said in a separate note on Friday, adding that the sequential accretion to deposits of ₹50,000 crore was higher than the expected increase of around ₹30,000 crore.

“The bank is on track to achieve an LDR of around 92% by the end of year, assuming 10% loan growth and 15% deposit growth,” the note said, adding that margins for the bank are expected to shrink by 10 bps on quarter in Q1 and remain flat for the whole of FY26 compared with 10-15 bps reduction for peers.

The weighted average lending rate on outstanding bank loans fell from 9.75% in March 2025 to 9.67% in May 2025, as per latest RBI data. In comparison, the fall in weighted average rate on outstanding deposits was slower from 7.11% in March to 7.07% in May 2025.