Indian banks are disbursing loans at a faster pace than they are accumulating fresh deposits, highlighting the limited success of dedicated initiatives aimed at strengthening the deposit base and mitigating credit risks, according to the latest Reserve Bank of India (RBI) data.

As of February 7, 2025, the banking sector's incremental loan-to-deposit ratio (LDR) on a three-month rolling basis surged to nearly 126%, as reported by The Economic Times.

For the current fiscal year, the incremental LDR stands at 103%, underscoring continued challenges in deposit mobilisation despite cautious lending approaches to unsecured loans and non-bank financing.

Bank credit grew by 11.3% year-on-year as of February 7, while deposits increased at a slower pace of 10.6%, according to official data.

According to The Economic Times report, an analysis by India Ratings indicates that since FY22, deposit growth has consistently lagged behind credit expansion, with an average gap of 416 basis points. This widening disparity has pushed the system-wide LDR to a five-year high of 80.4% in the first half of FY25.

"With the system LDR reaching its highest point in the past five years at 80%, the reliance on alternative funding sources, such as infrastructure bonds, is expected to persist," India Ratings noted in its report.

It also warned that "competition for bulk deposits will likely intensify if granular deposit growth remains weak."

A persistently high LDR suggests that banks are increasingly depending on borrowed funds and other non-deposit sources to sustain credit growth, a trend that could restrict their lending capacity in the medium term and raise liquidity concerns.