Banks cut government debt holdings to increase advances as deposit growth slows

Banks are mandated to hold at least 18% of their net demand and time liabilities (NDTL) in government papers and other approved securities. They typically keep an additional 10 percentage points more in such securities.

The statutory liquidity ratio (SLR)—the percentage of aggregate deposits invested in liquid assets—of the banking sector was 26.5% on 17 October, down from 27.3% on 18 October 2024, according to the RBI data analysed by Mint. The SLR holdings were 26.7% of the NDTL on 19 September. Given that the NDTL was at ₹259.8 trillion on 17 September, a 10-basis point decline allows banks access to almost ₹26,000 crore in funds.

“Some banks have offloaded investments to fund credit growth when deposit growth has not kept pace,” said Madan Sabnavis, chief economist at Bank of Baroda.

Sabnavis said a clutch of lenders has been liquidating SLR investments in the past, at least for FY25.

“We found instances when we look at the investment portfolio and lending portfolio of some banks,” he said.

According to Sabnavis, one reason bank investments in government securities have not grown at the same pace as before could be because there had been open market operations (OMO) in the beginning of the financial year for a couple of months. Under OMO, the central bank infuses liquidity in exchange for government securities from banks.

“Since banks had surplus SLR, they obviously did extinguish these securities,” he said.

Bank deposits are still growing at a slower rate than credit. While deposits grew 9.5% year-on-year as of 17 October, non-food credit growth was 11.3%, per data from the RBI. In the previous fortnight—3 October—deposits grew 9.9%, whereas non-food credit growth was 11.2%. Non-food credit excludes loans given to the Food Corp. of India, the main agency that procures, stores and distributes food grains in the country.

Chase for deposits

In a report on 20 October, analysts at Care Ratings said that deposit growth had fallen below the double-digit threshold for the third consecutive fortnight on 3 October. Fresh data showed that this is now true for four consecutive fortnights.

Bankers said the chase for deposits is a systemic issue. India faced one of its worst deposit crises last year, with deposit growth significantly lagging credit growth. This led to caution from the central bank and then RBI governor Shaktikanta Das said in July 2024 that households and consumers who typically park funds with banks are increasingly turning to the capital markets and other financial intermediaries.

While the gap has narrowed and even converged a few months ago, it has been short-lived.

“These are also times when overall industry CASA (current and savings accounts) and deposit growth has been mute,” K.V.S. Manian, managing director and chief executive officer (CEO) of Federal Bank, told analysts on 18 October.

However, Federal Bank’s deposit growth was ahead of loan growth. Its deposits grew 7.4% y-o-y to ₹2.9 trillion in the three months ended September and advances were up 6.2% to ₹2.4 trillion.

“One is also hoping that the tide will turn a bit also on that and deposit growth will, in general, pick up—that will also give us some tailwind to do better,” said Manian.

At public sector lender Punjab National Bank, deposit and credit growth are a tad divergent. The bank’s domestic deposits grew 10.4% y-o-y to ₹15.6 trillion in Q2 of FY26, while local loans grew 10.5% to ₹11.2 trillion.

“The bank is prioritizing an increase in the CASA share of total deposits and enhancing the RAM (retail, agriculture, MSME) portfolio in total advances, which will collectively support improvement in net interest margin and overall profitability,” Ashok Chandra, managing director and CEO of Punjab National Bank, told analysts on 18 October.

Seasonal credit growth

Others said that the credit-to-deposit ratio for fresh loans and deposits does not show that banks are deposit-starved but growth needs to pick up in the second half of the financial year.

“Although the incremental credit-to-deposit ratio for banks appears to be comfortable at 67% for the current year (year-to-date), it is higher than 60% seen at the same time last year,” said Anil Gupta, senior vice-president and co-group head of Icra.

Gupta said that with credit growth outpacing deposit growth for the past few fortnights and the upcoming period of seasonal higher credit growth, banks will have to start chasing deposits aggressively.

“The upcoming changes in the liquidity coverage framework from April 2026 could provide some relief to banks as the requirements for high quality liquid assets could decline, which means banks could deploy more deposits towards credit instead of SLR securities,” he said.

In the final guidelines on liquidity coverage ratio released in April, the RBI allowed banks to set aside a lower stock of liquid assets against deposits raised through digital channels, in the event of a potential run on banks.