Indian banks are struggling to raise deposits: India’s banking system looks healthier than it has in years. Bad loans are at a multi-decade low, capital buffers are strong, and profitability has exceeded expectations. Yet beneath these reassuring numbers lies a quieter strain. Banks are struggling to mobilise deposits fast enough to fund credit growth. The latest Trend and Progress of Banking in India 2024-25 from the Reserve Bank of India captures this contradiction with unusual clarity: a resilient system operating under rising funding pressure.
Scheduled commercial banks reported a return on assets of 1.4% and return on equity of 13.5% in 2024-25—levels that would have seemed aspirational not long ago. Profitability remained firm even in the first half of 2025-26 despite margin pressures. But these gains coexist with a structural imbalance. Credit is expanding faster than deposits, pushing the system-wide credit-deposit ratio beyond 80%. Banks are lending aggressively, but the pool of stable, low-cost funds is no longer keeping pace.
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Credit is outrunning deposits in a tighter monetary regime
The deposit challenge cannot be understood without acknowledging the shift in monetary conditions. The post-pandemic period of abundant liquidity has decisively ended. Since mid-2022, the RBI has been withdrawing surplus liquidity through variable rate reverse repos, the standing deposit facility, and calibrated open market operations. System liquidity now oscillates between marginal surplus and deficit.
This matters because excess liquidity once softened the impact of weak deposit growth. Banks could rely on low-cost overnight funds to bridge gaps. That cushion has disappeared. As liquidity tightens, the marginal cost of funds rises even before banks compete harder for deposits. What looks like a behavioural shift in savings is also, in part, the result of a deliberate monetary stance aimed at anchoring inflation.
In this environment, lending faster than deposits becomes more consequential. Banks are not merely competing for savings; they are doing so in a regime where liquidity no longer papers over funding mismatches.
Household savings moving away from Indian banks
The deposit slowdown also reflects a deeper reordering of household finance. For decades, bank deposits were the default destination for savings, supported by habit, limited choice, and regulated interest rates. That equilibrium has broken.
Mutual funds, insurance products, small savings schemes, and market-linked instruments now command a growing share of household surplus. Equity participation has widened, especially among younger earners who entered the workforce during a prolonged bull market. With real returns on savings deposits remaining modest, banks have lost their automatic claim on household savings.
This is not a temporary diversion. Financialisation has broadened the menu of choices, and digital platforms have made access easier. Deposits now compete not just on safety, but on returns and convenience.
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CASA erosion raises the real cost of funding
The more immediate stress lies not only in deposit growth, but in deposit composition. Across large banks, CASA ratios have declined as savers move out of low-yield savings accounts into term deposits or alternative instruments. To retain funds, banks are offering higher rates on fixed deposits, often with shorter maturities.
The result is a steady rise in the cost of deposits even where balances are retained. Funding growth increasingly depends on high-cost retail and bulk term deposits rather than sticky savings balances. This explains why margin compression has persisted despite strong credit growth. Today’s profitability is being supported by benign asset quality and operating leverage; it is less insulated from funding pressures than headline numbers suggest.
NBFCs compete with fewer liquidity constraints
Competition from non-bank financial companies has intensified these pressures. NBFCs have tapped bond markets, commercial paper, and structured products with greater flexibility, allowing them to price loans competitively in retail and small-business segments.
Regulatory asymmetry sharpens the contrast. Banks operate under stringent liquidity requirements, including statutory liquidity ratio holdings and liquidity coverage ratio norms that compel them to hold large volumes of low-yielding liquid assets. These buffers are essential for stability, but they also constrain how efficiently deposits can be deployed into credit when funding is scarce.
NBFCs face lighter liquidity constraints, giving them an advantage in a tight funding environment. For banks, the squeeze is two-sided: higher funding costs on one side, and competition from intermediaries playing by different rules on the other.
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Digital convenience has weakened deposit stickiness
Technology has further eroded the traditional deposit franchise. Digital banking has reduced transaction frictions but also slashed switching costs. Depositors can move funds across platforms in seconds, chasing marginally better rates or user experience. Loyalty, once central to retail banking, has thinned.
The RBI has also flagged the operational dimension of this shift. Rapid digitisation exposes banks to new risks, including cyber threats, even as it makes funding less predictable. Deposits have become more price-sensitive precisely when banks need stability the most.
Strong balance sheets do not eliminate funding risk
The irony is that this funding stress is unfolding alongside a sharp improvement in asset quality. Gross non-performing assets are at their lowest in years. Retail portfolios show limited stress, while education and housing loans have improved steadily. Vulnerabilities remain in credit cards, consumer durables, and vehicle loans, but overall credit risk has receded. The share of unsecured loans has declined for a second consecutive year to 24.5%.
Cleaner balance sheets encourage banks to lend more. But confidence on the asset side does not solve constraints on the liability side. To attract deposits, banks must raise rates, compressing margins. Over time, this trade-off can dull profitability and heighten sensitivity to shocks.
A system adjusting to a new equilibrium
The RBI’s emphasis on stronger risk assessment and governance is therefore well-placed. In a competitive funding environment, the temptation to chase growth by loosening underwriting standards or leaning more heavily on wholesale funding is real. History offers enough reminders of how quickly such strategies unravel once conditions turn.
The broader picture is of a financial system in transition. India is no longer a bank-dominated economy, and that is not inherently a weakness. Diversified channels of finance can allocate capital more efficiently and support growth. But transitions are rarely smooth.
For banks, the challenge is to rebuild deposit franchises in a tighter monetary regime, manage funding costs without diluting standards, and adapt to a digital financial environment that no longer guarantees loyalty. For regulators, the task is to manage asymmetries without undermining stability. India’s banking paradox is not a crisis—but it is a test of whether institutions can evolve as quickly as the economy around them.