Bank credit grows 18.6% in June, fastest in two years; funding gap narrows

Outstanding bank credit rose 18.6% year-on-year to Rs 219.3 lakh crore as of June 30, marking the strongest annual growth in nearly two years, while deposits grew 13.3% to Rs 265.4 lakh crore, narrowing the credit-deposit growth differential to 535 basis points from 564 basis points a fortnight earlier. Consequently, the loan-to-deposit ratio (LDR) moderated to 82.6% from 83.4%, reflecting stronger sequential deposit growth and early benefits of the Reserve Bank of India's measures to boost foreign currency inflows through FCNR(B) deposits, external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs), according to CareEdge Ratings.

Sequentially, bank credit increased by 1.8% during the fortnight, supported by resilient retail lending, particularly gold and vehicle loans, steady credit flow to MSMEs, improving corporate credit demand and continued lending to NBFCs. Deposit growth outpaced credit expansion during the period, rising 2.7% sequentially with accretions exceeding Rs 7 lakh crore, indicating sustained mobilisation efforts by banks alongside improving liquidity conditions.

Despite the improvement, the LDR remains well above the 78.9% recorded a year ago, suggesting banks will continue to prioritise deposit mobilisation to sustain healthy credit growth while maintaining adequate liquidity buffers. The rating agency expects the ratio to remain elevated in the near term as credit demand stays robust, although improving deposit growth and easing systemic liquidity should gradually reduce funding pressures.

The forecast

Looking ahead, overall bank credit growth is expected to moderate to 14.5%-15.5% in FY27 as the current pace normalises. The agency said recent strong credit growth partly reflected borrowers' preference for bank funding as elevated bond yields made capital market borrowings and ECBs relatively less attractive. Any decline in bond yields, improvement in capital market conditions or lower overseas borrowing costs could encourage large corporates and NBFCs to shift part of their funding back to market-based sources, tempering incremental demand for bank loans.

Banks continued to favour lending over investments, with bank credit accounting for 74.2% of total assets as of June 30, up 20 basis points from the previous fortnight, while the share of government securities declined marginally to 24%.

Short-term funding conditions also improved during the fortnight. Outstanding certificates of deposit (CDs) moderated marginally to Rs 6.66 lakh crore, while fresh CD issuance fell by nearly one-third to Rs 69,800 crore. CD funding costs softened, with the upper end of issuance rates declining to 7.6% from 7.8%, indicating reduced reliance on higher-cost wholesale funding amid stronger deposit mobilisation and easing liquidity pressures.

The weighted average call rate also eased marginally to 5.31% as of July 3, remaining just six basis points above the prevailing repo rate of 5.25%, reflecting comfortable money market liquidity.