Indian banks ended the first quarter of fiscal 2027 with elevated credit growth on a year-on-year basis, according to a report by Business-Today dated July 1, 2026. Several lenders reported advances growing at double the system rate, even as the wedge between credit and deposit growth widened further. Some banks, including Bank of Baroda, IDBI Bank, and RBL Bank, posted a sequential decline in deposits compared with end-March 2026 levels.
Q1 Credit Growth Accelerates
Central Bank recorded the highest global advances growth of about 28.8%, followed by Tamilnad Mercantile Bank at 27%, Dhanlaxmi Bank at 26.5%, and J&K Bank at 25.5% on a year-on-year basis, the report said. Among large lenders, Bank of India reported advances growth of 18.6%, and Canara Bank posted approximately 18%, reflecting continued traction in corporate and RAM (retail, agriculture, and MSME) segments. The report noted that credit growth remained elevated across the banking system even though Q1 is typically a lean season for credit.
Deposit Growth Lags, Widening Gap
In contrast to robust lending, deposit growth struggled. RBL Bank reported a 10.2% quarter-on-quarter decline in total deposits. The bank said it took a tactical decision to allow high-cost wholesale deposits to roll off after completing a preferential allotment to Emirates NBD on June 18, 2026, and relied on improved liquidity following the transaction. IDBI Bank reported a 6.3% sequential decrease, with total liabilities falling from ₹3,47,163 crore to ₹3,25,393 crore. Bank of Baroda posted a 0.9% decline in both global deposits and global advances compared with the March quarter.
The broader pressure is evident from the latest central bank data up to June 15, 2026. According to Suresh Ganapathy of Macquarie, deposit growth remains the pressure point, trailing advances at 12.2% year-on-year. This has widened the credit-deposit growth gap to 5.4% as of May-26, pushing the system loan-to-deposit ratio to 82.7% — which he said "is among the highest levels in over a decade."
Strategic Divergence Between Public and Private Banks
Differences in strategy between public and private lenders remain visible, the report said. Public sector banks such as Canara Bank and Bank of India maintained a more aligned credit and deposit growth trajectory on a sequential basis, with growth in the range of 2.0% to 4.5% across assets and liabilities. Private banks continued to adjust liability profiles by reducing high-cost bulk deposits to manage margins in a competitive market.
| Bank | Advances Growth (YoY) | Deposit Trend (Sequential) |
|---|---|---|
| Central Bank | ~28.8% | — |
| Tamilnad Mercantile Bank | ~27% | — |
| Dhanlaxmi Bank | ~26.5% | — |
| J&K Bank | ~25.5% | — |
| Bank of India | ~18.6% | — |
| Canara Bank | ~18% | — |
| RBL Bank | — | -10.2% QoQ (tactical roll-off) |
| IDBI Bank | — | -6.3% QoQ |
| Bank of Baroda | -0.9% QoQ | -0.9% QoQ |
Drivers: Emergency Credit, Supply Chains, Oil Prices
The report identified several drivers behind the surprising Q1 credit growth in what is usually a lean period. One factor was the introduction of an emergency credit line guarantee scheme. Additionally, working capital cycles grew longer due to supply chain disruptions caused by the blockade in the Strait of Hormuz following the conflict in West Asia. Oil companies also turned borrowers as net realisations dropped because the government decided not to pass on the increase in crude oil prices to consumers.
Analyst View: Pressure on Deposit Growth
According to Suresh Ganapathy of Macquarie, PSU banks are losing market share on deposits. "Based on 1QFY27 disclosures, deposit growth has been weak for them and deposit growth at 10.7% YoY is weaker than system deposit growth of 12%… That's why some PSU banks stock prices have been weak post business updates," he said. For banking CFOs and treasury professionals, the widening credit-deposit gap implies rising cost of funds and potential margin compression. Trade finance professionals should note that supply chain disruptions are extending working capital cycles, boosting demand for credit even as deposit mobilization remains a challenge. The elevated loan-to-deposit ratio of 82.7% could also constrain banks' ability to finance additional trade and capital expenditure without raising deposit rates or tapping wholesale funding, adding to the cost of capital for corporates engaged in international trade.
Sources:
