Credit-deposit gap to persist as loan demand dynamics have changed, says SBI Research

SBI Research highlights a persistent credit-deposit gap emerging in India's banking system, signaling structural shifts in consumer and corporate financial behavior. This divergence reflects a fundamental recalibration of how depositors allocate savings and how companies access working capital amid macroeconomic headwinds. The trend underscores mounting pressure on traditional deposit-gathering mechanisms that have historically funded loan portfolios.

Deposit growth is lagging credit expansion as retail savers diversify into equities, mutual funds, and other market-linked instruments, reducing the deposit pool available to banks. Simultaneously, companies facing geopolitical uncertainty and elevated commodity prices are amplifying working capital borrowing demands. This dual squeeze—shrinking deposit inflows and rising loan demand—creates a structural funding mismatch that pressures net interest margins and liquidity management for lenders like State Bank of India (SBKFF).

The introduction of FCNR(B) deposits (Foreign Currency Non-Resident Bank deposits) offers tactical relief by attracting dollar-denominated inflows, though such measures address symptoms rather than the underlying behavioral shift. The projected migration toward five-year deposit maturities suggests depositors are locking in returns amid volatile rate expectations, further constraining banks' operational flexibility in a dynamic lending environment.

Sector implication: Indian financial services face compression in traditional deposit-driven profitability models. Banks must compete aggressively for liabilities while managing loan-growth ambitions, potentially pressuring return on assets and requiring portfolio optimization toward higher-margin lending segments.