A recent CareEdge Ratings report painting a sobering picture of slowing credit and deposit growth as of May 30, 2025. The numbers tell a story of caution, with credit offtake growing at a modest 9% year-on-year to Rs 182.9 lakh crore, a sharp drop from last year’s robust 16.1%.
Deposits, meanwhile, clocked a slightly better 9.9% year-on-year rise, reaching Rs 231.7 lakh crore, but still lagged behind the previous year’s 12.2%. For the first time in recent fortnights, deposits have outpaced credit growth, nudging the Credit-to-Deposit (CD) ratio down to 78.9%, a 72-basis-point dip from the prior period.
This shift, coupled with a declining Weighted Average Call Rate (WACR) to 5.8% from 6.56% a year ago, reflects a banking system grappling with high base effects, muted demand, and a pivot toward alternative investments.
What does it mean?
A high base from last year’s credit boom plays a part, but there’s more at play. Credit demand is softening across sectors, with banks reporting a mere 0.3% sequential uptick in loans compared to a 1.25% rise in deposits.
This divergence suggests depositors are flocking to banks, possibly lured by the prospect of locking in returns before further rate cuts, while borrowers remain wary. The Reserve Bank of India (RBI) has been pulling out all stops to spur growth, slashing the repo rate by 50 basis points to 5.5% in its June 2025 meeting and cutting the Cash Reserve Ratio by 100 basis points in phases.
These moves, alongside a liquidity surplus, have fueled deposit inflows of Rs 2.85 lakh crore in the latest fortnight, dwarfing the Rs 0.59 lakh crore in credit offtake.
Yet, the muted credit growth hints at deeper demand-side challenges—corporates and consumers alike seem hesitant to borrow, perhaps spooked by economic uncertainties or lured by other investment avenues.
The RBI’s shift to a neutral policy stance is a telling move. It signals that the central bank, while committed to growth, is treading carefully, mindful of inflation risks even as the outlook improves. The lower WACR, a direct outcome of three successive rate cuts and liquidity infusion, should ideally grease the wheels of lending. But the data suggests otherwise.
Banks are leaning heavily on short-term instruments like certificates of deposit (CDs), with outstanding issuances surging 39.2% year-on-year to Rs 5.13 lakh crore.
Commercial paper (CP) issuances are also up, hitting Rs 553.8 lakh crore with a 37.1% year-on-year jump. This reliance on short-term funding points to a cautious banking sector, prioritizing liquidity over aggressive lending.
Look closer, and the asset allocation tells a similar story. The credit-to-total-assets ratio has slipped to 69.9%, while government investments, holding steady at 25.6% of total assets (Rs 67.1 lakh crore), reflect banks’ preference for safer bets.
This conservatism is understandable but worrisome. A CD ratio consistently below 80% for five fortnights signals that banks are flush with funds but struggling to deploy them productively.
The allure of alternative investments—think mutual funds or equity markets—is siphoning off household savings, making it tougher for banks to grow deposits organically. This trend, coupled with deposit repricing, is squeezing the system further.
What does this mean for India’s economic engine? The RBI’s pro-growth measures are a lifeline, but they’re not a cure-all. If corporates remain shy of borrowing and households continue to chase higher returns elsewhere, banks could find themselves stuck in a low-growth trap.
The neutral policy stance suggests the RBI knows it’s walking a tightrope—stimulating growth without reigniting inflation. For banks, the challenge is to innovate, perhaps by offering more attractive deposit products or targeting underserved sectors like small businesses or infrastructure.
The 8.5% year-on-year rise in government investments is a safe play, but it’s not enough to drive the kind of economic momentum India needs.
This is a moment for reflection. The banking sector, long the backbone of India’s growth story, is navigating a soft patch. The RBI’s rate cuts and liquidity boosts are steps in the right direction, but they can’t fully address the demand-side hesitancy or the structural shift toward alternative investments.
Policymakers and bankers need to rethink strategies to restore confidence in credit markets. Targeted lending programs or incentives for key sectors could help.
For now, the numbers are a wake-up call—a reminder that even in a liquidity-rich environment, growth isn’t guaranteed without demand to match. As India charts its economic course, the banking sector’s ability to adapt will be critical.