MUMBAI: Credit growth surged to a high even as deposits shrank in the first two months of FY27, widening the funding gap and pushing banks deeper into a liquidity squeeze, with the wedge between loans and deposits reaching about Rs 3.8 lakh crore by May 31.Credit growth stood at 17.7% for the fortnight ending May 31, 2026, the highest recorded so far in the current financial year and the strongest year-on-year expansion since June 2024. Outstanding bank credit rose by Rs 1.5 lakh crore since March 31, 2026, marking a 0.7% increase (year-to-date), with total credit touching Rs 215.2 lakh crore. Bankers said demand is being driven partly by oil marketing companies facing lower realisations after the surge in crude prices. They added that govt support through the emergency credit line guarantee scheme has also lifted credit offtake.
Outstanding credit up
Deposits, however, moved in the opposite direction. Aggregate bank deposits declined by Rs 2.3 lakh crore since March 31, 2026, a contraction of 0.9%, taking the total to Rs 260 lakh crore as of May 31, 2026. This divergence between rising credit and falling deposits has resulted in a wedge of Rs 3.8 lakh crore in just two months of the current fiscal.For FY26 as a whole, deposits had increased by Rs 36.5 lakh crore between March 2025 and March 2026, while credit rose by Rs 31.1 lakh crore during the same period.Deposit growth has remained inelastic, typically ranging between 9% and 13%. As of May 31, 2026, deposit growth was 12.2%, lagging credit growth by more than 500 basis points.This structural mismatch has driven the credit-deposit ratio above 80% since Oct 2025, reaching 82.8% in May 2026 after peaking at over 83% at the end of March 2026. During the pandemic liquidity glut, the ratio had fallen to a low of 69.6% in Nov 2021.Banks have adjusted their balance sheets to fund higher credit demand. They have slowed investments in govt securities, with growth in such holdings dropping to about 2% in Jan 2026 and recovering modestly to 4.9% by May 31, 2026. This pullback reflects that there is a need to free up liquidity amid weak deposit mobilisation.The current phase reflects a tightening environment, where credit growth continues to outpace deposit growth, leaving the system with a credit-deposit ratio of 82.8%.