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Deposit Growth Outpaces Credit in Q4FY26, Easing Liquidity for Banks

A PhillipCapital report indicates India's banking sector saw deposit growth outpace credit expansion in Q4FY26, easing loan-to-deposit ratios and system liquidity. However, net interest margins are under pressure, leading to muted net interest income growth and subdued pre-provision operating profit. On a positive note, asset quality continues to improve with declining credit costs and lower NPAs. The non-banking space, particularly gold financiers, is expected to report robust growth exceeding 25%.

Key Points: Bank Deposits Outpace Credit, Margins Under Pressure: Report

  • Deposit growth outpaces credit
  • Margin pressure weighs on NII
  • Asset quality continues to improve
  • Gold loan growth strong at 25%+
2 min read

Deposit growth outpaces credit in Q4FY26, but margin pressure weighs on banks: Report

PhillipCapital report shows strong deposit growth easing LDR in Q4FY26, but warns of margin pressure and subdued profitability for banks.

"With deposit growth outpacing credit expansion in Q4FY26, loan-to-deposit (LDR) levels eased by 50-60 bps... creating headroom for future credit growth. - PhillipCapital Report"

New Delhi, April 9

India's financial sector is likely to see a mixed performance in the fourth quarter of FY26, with stronger deposit growth, improving asset quality, but pressure on margins and profitability, according to a report by PhillipCapital.

The report highlighted that deposit growth has emerged as a key positive surprise during the quarter, outpacing credit expansion and easing liquidity pressures in the system.

"Banking balance sheets are expected to witness healthy growth sequentially across both assets and liabilities, with liability franchises outperforming this quarter," the report said.

It added that loan growth (excluding HDFC Bank) rose about 5.1 per cent sequentially, while deposits increased at a sharper pace of 5.6 per cent.

The improvement in credit growth was supported by seasonal factors, affordable EMIs, easing stress in the unsecured segment, and increased government spending.

The report further said that deposit growth exceeding credit growth has helped ease loan-to-deposit ratios.

"With deposit growth outpacing credit expansion in Q4FY26, loan-to-deposit (LDR) levels eased by 50-60 bps... creating headroom for future credit growth," it stated.

However, it cautioned that the sustainability of deposits remains a key monitorable, particularly due to increased reliance on certificates of deposit in the last quarter of FY26.

On profitability, the report pointed to pressure on margins. "Muted NII growth due to margin contraction... sector NIM will decline... as loan repricing continues," it said, estimating net interest income (NII) growth at 8.2 per cent year-on-year.

Pre-provision operating profit is also expected to remain subdued. "Pre-provision profit should grow 0.2 per cent YoY... due to low treasury contribution," the report noted.

Despite this, asset quality trends remain encouraging. The report said, "Credit cost should be benign due to continued improvement in asset quality," with credit costs seen declining to 45 basis points in Q4FY26.

The report added that gross and net NPAs are expected to improve further, reflecting sustained balance sheet strength across banks.

In the non-banking space, the report flagged strong growth momentum. Gold financiers are expected to report 25 per cent plus gold loan growth.

Overall, the report maintained that while growth remains healthy across segments, margin pressures and treasury performance will be key factors shaping earnings in the near term.

- ANI

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Reader Comments

P
Priya S
Finally some relief for borrowers! If deposit growth is outpacing credit, maybe banks will slow down the hike in loan interest rates? My home loan EMI is already eating a big chunk of my salary. 🤞 Hope this trend continues.
R
Rohit P
The report says sustainability of deposits is a monitorable. Absolutely right. If people are parking money in fixed deposits just because other investment options are volatile, it's not a stable source. Banks need genuine CASA growth, not just seasonal inflows.
S
Sarah B
Interesting read. The part about gold loan growth at 25%+ is fascinating. In many Indian households, gold is the go-to asset during uncertainty. This suggests NBFCs are tapping into a very deep, traditional source of liquidity.
V
Vikram M
Mixed bag for sure. On one hand, lower credit costs and better NPAs are excellent news. On the other, muted PPOP and NII growth is worrying. Seems like the sector's health is improving, but shareholder returns might take a short-term hit. Typical Indian story – strong fundamentals, pressure on profits.
K
Kavya N
As a salaried person, I've seen my bank's FD rates become slightly more attractive recently. This report explains why. They need our deposits! Good time to lock in some savings if you have lump sum money. 💰

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