Bank Credit Growth Rises to 19.4%, Outpacing Deposit Growth in September

Quarter-end lending lifted outstanding bank credit to ₹229.9 lakh crore, while deposits reached ₹284 lakh crore. The widening growth gap and narrowing liquidity surplus could increase funding costs for banks.

Bank credit growth accelerated to 19.4% year-on-year (y-o-y) in the fortnight ended September 30, 2026, compared with 18.1% on September 15. Deposit growth also increased, reaching 17.8% from 17.3%, but continued to trail credit growth, according to CareEdge Ratings data based on Reserve Bank of India (RBI) figures.

Outstanding bank credit increased by ₹6.65 lakh crore during the fortnight to ₹229.9 lakh crore, while deposits rose by ₹7.73 lakh crore to ₹284 lakh crore. The credit-deposit growth gap widened to approximately 155 basis points (bps), from around 80 bps on September 15. The loan-to-deposit ratio (LDR) edged up to 81.0% from 80.8%.

Bank Credit Growth Reaches 19.4%

Outstanding bank credit increased by ₹6.65 lakh crore during the fortnight ended September 30. On a year-on-year basis, credit growth rose to 19.4%, compared with 18.1% on September 15 and 11.4% a year earlier.

Credit typically increases during the final fortnight of a quarter. In the first half of FY27, banks added ₹16.35 lakh crore in credit, approximately 1.6 times the ₹10.17 lakh crore added during the corresponding period a year earlier.

Credit growth remained broad-based across agriculture, industry, services and personal loans. Strong deposit growth in recent months, supported by Foreign Currency Non-Resident Bank (FCNR(B)) inflows, is expected to support further lending.

However, CareEdge Ratings expects credit growth to moderate in the second half of FY27 as the comparison base becomes less favourable and borrowing costs rise.

Headline consumer price index (CPI) inflation stood at 4.8% in August, while wholesale inflation was 9.9%. On October 7, the RBI raised the repo rate by 25 bps to 5.50% and shifted its stance to calibrated tightening.

The rate increase is expected to feed through to lending rates, beginning with loans linked to external benchmarks such as the repo rate, followed by marginal cost of funds-based lending rate (MCLR)-linked loans as banks' funding costs rise. Higher borrowing costs could moderate loan demand among retail and corporate borrowers.

CareEdge Ratings continues to expect bank credit growth of around 15.0%–16.0% in FY27.

Deposit Growth Improves but Remains Below Credit Growth

Bank deposits increased by ₹7.73 lakh crore during the fortnight to ₹284 lakh crore, reversing the ₹2.49 lakh crore decline recorded in the previous fortnight. Year-on-year deposit growth reached 17.8%, compared with 17.3% on September 15 and 17.75% at the end of August.

Demand deposits rose by ₹4.00 lakh crore, accounting for just over half of the total increase, while time deposits increased by ₹3.72 lakh crore. The share of time deposits in total deposits eased to 86.8%, from 87.2% a year earlier.

On a year-on-year basis, time deposits grew 17.3%, while demand deposits increased 21.6%. Total deposits added during H1 FY27 reached ₹21.67 lakh crore, compared with ₹15.18 lakh crore in the corresponding period a year earlier.

Competition for deposits had remained contained while the banking system was in a liquidity surplus. However, the surplus has narrowed and short-term market rates have risen.

The 91-day Treasury bill yield increased to 5.39% in the week ended September 25, from 5.21% two weeks earlier. The lower end of certificate of deposit (CD) rates rose to 5.77% from 5.57% over the same period. These movements preceded the RBI's October 7 repo rate increase to 5.50%.

The rate hike is expected to put upward pressure on term deposit rates as banks seek to fund credit growth that continues to outpace deposit mobilisation.

Loan-to-Deposit Ratio Rises to 81.0%

The LDR increased by 14 bps to 81.0%, marking its second consecutive rise after the end of August. During the fortnight, credit grew 3.0%, compared with 2.8% growth in deposits.

The incremental credit-deposit ratio for H1 FY27 rose to 75.4%, from 69.5% in the same period last year. Credit added during the first half of FY27 was 1.6 times the year-earlier amount, compared with 1.4 times for deposits.

Despite the latest increase, the LDR remained below its May 2026 peak of 82.7%, indicating that banks were better placed on funding than earlier in FY27.

However, with incremental credit accounting for 75.4% of incremental deposits and the repo rate now at 5.50%, financing further loan growth is likely to become more expensive.

Credit Share of Bank Assets Increases

Bank credit accounted for 74.1% of total assets at the end of September, compared with 73.9% in the previous fortnight. The share of government securities eased to 24.1%, from 24.2%.

Bank investments increased by ₹1.55 lakh crore during the fortnight. However, credit grew faster than investments, and the investment-deposit ratio edged down to 26.3% from 26.5%.

RBI Liquidity Surplus Narrows to ₹4.86 Lakh Crore

System liquidity peaked at approximately ₹11.2 lakh crore in early September, supported by the RBI's special FCNR(B) swap window. Under the facility, banks provided the RBI with dollars they had raised and received rupees in return. These rupees continued to enter the banking system until the execution window closed on September 11.

The resulting surplus had pushed the weighted average call rate (WACR) down to 4.97%. However, the surplus subsequently narrowed as the RBI absorbed liquidity through government bond sales and tax-related outflows.

With longer-tenor variable rate reverse repo (VRRR) auctions attracting weak demand, the RBI announced ₹1 lakh crore in open market bond sales across three September tranches.

Mid-September tax outflows also increased government cash balances. Net RBI credit to the government fell by ₹2.62 lakh crore during the fortnight to September 30.

The RBI's net outstanding liquidity, including end-of-day absorption, stood at ₹4.86 lakh crore on September 30, following an outright bond sale of ₹25,000 crore on September 29.

Overnight rates are likely to move towards the repo rate as the RBI continues to absorb surplus liquidity. The 10-year government securities yield rose to 7.18% on September 30, crossing 7% amid global factors and additional supply.

Certificate of Deposit Issuance Nearly Doubles

Outstanding certificates of deposit increased by ₹14.5 thousand crore during the fortnight to ₹574.1 thousand crore. This was the first increase after two consecutive fortnights of decline, although outstanding CDs remained below the mid-August level.

CD issuance nearly doubled to ₹74.6 thousand crore at the end of September, compared with ₹39.9 thousand crore in the previous fortnight. The increase indicates greater reliance on wholesale funding as the liquidity surplus narrows and credit growth continues to exceed deposit growth.

Issuance rates rose at both ends of the range. The lower-end rate increased to 5.77% from 5.57%, while the upper-end rate rose to 7.33% from 7.18%. The spread narrowed to 156 bps from 161 bps in the previous fortnight.

With the repo rate at 5.50%, CD rates are expected to rise further, adding to wholesale funding costs for banks using these instruments to bridge the gap between credit and deposit growth.

Source: Reserve Bank of India (RBI), CareEdge Ratings. Note: Quarter-end data reflects the last fortnight of the quarter.

RBI Announces Changes to Banking and Financial Regulations

The RBI also announced regulatory changes covering capital adequacy norms for All India Financial Institutions (AIFIs), daily cash reserve maintenance and foreign exchange risk reserves.

Capital Adequacy Norms for AIFIs

Under the Fifth Amendment Directions, 2026, the RBI amended capital adequacy norms for AIFIs to align them with international standards.

The amendment replaces the requirement under paragraph 77(6)(i)(a) relating to legal opinions for clearing member financial institutions. A 2% risk weight will apply to AIFIs' trade exposures to Qualified Central Counterparties (QCCPs) involving over-the-counter derivatives, exchange-traded derivatives and securities financing transactions (SFTs).

The requirement also applies to client-clearing exposures where an AIFI is obligated to reimburse clients for losses resulting from a QCCP default. The amendment is effective from the date of issue.

Daily Minimum Cash Reserve Maintenance Increased to 99%

The RBI decided to increase the minimum daily maintenance requirement for the Cash Reserve Ratio (CRR) from 90% to 99% of the prescribed requirement, effective from the reporting fortnight beginning October 16, 2026.

Scheduled banks may maintain the minimum required CRR on all days during the reporting fortnight, provided the average CRR maintained daily is not below the level prescribed by the RBI.

Foreign Exchange Risk Reserve Requirement Introduced

The RBI introduced a Foreign Exchange Risk Reserve (FERR) requirement for authorised dealers on rupee-involving foreign exchange derivative contracts with users.

The requirement applies to contracts exceeding the equivalent of USD 2 million for hedging current-account transactions in which users buy foreign currency against the Indian rupee.

Dealers must maintain a reserve equivalent to 20% of the contract's rupee notional value in cash with the RBI daily until the contract terminates. Splitting transactions across dealers to circumvent the threshold will be treated as a violation. Dealers must report reserves daily through the Centralised Information Management System (CIMS).

The directions apply to contracts entered into after their issuance.