Cheap money is running out, and India’s banks know it

Indian banking is in the middle of its strongest credit cycle in years. Bank credit stood at Rs 227.4 lakh crore on October 15, 2026, growing 18.2 per cent year on year. A year earlier, growth was only 11.6 per cent. Credit growth was 10.4 per cent in September 2025, rose to 14.5 per cent by December and has stayed above 16 per cent since March 2026.

The headline growth did slip from 19.4 per cent at the end of September. That is not a warning sign. It is the quarter-end build-up unwinding: credit fell Rs 2.52 lakh crore in the latest fortnight. Over the two fortnights since 15 September, credit is still up Rs 4.14 lakh crore, or 1.9 per cent.

The real story is the funding

A boom needs money, and the money is getting harder to find. Deposits grew 16.7 per cent year on year, which is strong, up from 9.5 per cent a year ago. But credit is growing faster than deposits, and that gap shows up in the loan-to-deposit ratio (LDR). The LDR rose to 81.6 per cent, its third straight increase. It is still below the May 2026 peak of 82.7 per cent.

The sharper number is the incremental LDR. Since April, banks have lent out 84.0 per cent of every new rupee of deposits, against 75.5 per cent at the end of September and 76.1 per cent a year ago. In plain terms, almost all fresh deposits are being lent out.

Banks are also adding more government securities. Their share of total assets edged up to 24.4 per cent, while credit’s share eased to 73.7 per cent. The investment-deposit ratio rose to 27.0 per cent. Banks are not abandoning lending, but they are keeping a larger safety cushion.

A surplus that has run dry

The liquidity cushion has thinned quickly. Surplus liquidity peaked at about Rs 11.2 lakh crore in early September, after banks swapped dollars raised through FCNR(B) deposits for rupees with the RBI. By October 15, the RBI’s net absorption of liquidity was Rs 1.86 lakh crore, down from Rs 4.86 lakh crore on 30 September.

Short-term rates have reacted. The weighted average call rate rose 44 basis points to 5.56 per cent, now above the 5.50 per cent repo rate. A week earlier it was 27 basis points below. The 91-day T-bill yield rose to 5.73 per cent from 5.52 per cent.

Deposits themselves are volatile. They fell Rs 5.19 lakh crore in the fortnight, reversing most of the Rs 7.73 lakh crore quarter-end rise. Demand deposits accounted for Rs 4.37 lakh crore, about 84 per cent, of the decline. These are cheap funds, and they do not stay put.

The RBI is tightening the screws

The central bank has moved on several fronts. It raised the repo rate by 25 basis points to 5.50 per cent on October 7. From the fortnight beginning October 16, banks must hold at least 99 per cent of the required cash reserve ratio every day, up from 90 per cent. The fortnightly average must still meet the prescribed CRR, but banks have less room to manage cash day to day. CareEdge, in its Wednesday report, expects this to keep overnight rates firm.

The RBI has also required authorised dealers to hold cash equal to 20 per cent of the rupee value of certain forex hedging contracts above $2 million. Separately, it aligned capital norms for All India Financial Institutions with international standards.

Let’s read this mix as a central bank that is quietly tightening liquidity and managing currency pressure, not one celebrating the boom.

Dearer money ahead

Banks now face a choice between slower lending and costlier funding. The CareEdge report points to the second, at least in the short run. With the surplus shrinking, funding further loan growth is likely to cost banks more.

Certificates of deposit show the pressure building. Banks issued Rs 0.45 lakh crore of CDs in the fortnight, down 38.6 per cent from Rs 0.74 lakh crore at September-end. Outstanding CDs rose to Rs 5.86 lakh crore. The lowest CD rate, 5.50 per cent, now sits at the repo rate, so CD rates are likely to rise. Term deposit rates of 6.00 per cent to 6.75 per cent for tenors above one year, and MCLRs, were unchanged at the latest reading, but the pressure is clear.

For borrowers, the rate hike should feed through first to loans linked to external benchmarks and later to MCLR-linked loans. CareEdge says this could moderate retail and corporate credit demand.

Festive cheer, then a harder base

Near term, demand looks healthy. Retail loans, such as auto, gold, consumer durables and personal, and corporate working capital typically pick up in October and November. Diwali falls on November 8, and the next two fortnights will show how strong festive demand is.

After that, the picture changes. The base becomes less favourable in the second half of FY27, so year-on-year growth will look weaker even if lending holds up. CareEdge retains its FY27 forecast for bank credit growth of 15.0 per cent to 16.0 per cent. That would mean a visible slowdown from today’s 18.2 per cent.

Where it all leads

Three conclusions follow from the data.

First, growth will cool, but gently. A fall from 18.2 per cent towards the 15 per cent to 16 per cent range is a normalisation, not a crash, and a part of it is simple base effect.

Second, the competition will be for deposits. Deposit growth is healthy, but with 84 paise of every new deposit rupee going out as loans, banks that cannot attract stable funds will have to pay up. That will squeeze margins unless loan rates rise to match.

Third, borrowers will feel it. Households already carry heavy debt. Crisil Ratings reports that household debt reached 45.8 per cent of GDP as of March 2026, up from 41.9 per cent in March 2024, and non-housing debt is 58.4 per cent of that. Crisil also cautions that higher-than-expected inflation and interest rates could weigh on asset quality. A rate hike arrives just when borrowers are most stretched.

The same Crisil report adds a competitive twist. Personal-loan NBFCs, with ageing risk problems behind them, expect to grow assets by about 50 per cent this fiscal, reaching nearly Rs 2 lakh crore. Banks are not the only ones chasing the retail customer.

The takeaway

The banking sector is not heading for a fall. It is heading for a reality check. The easy phase, when surplus liquidity and low rates let credit race ahead, is ending. What comes next rewards banks that can raise stable deposits cheaply and price risk honestly. Those that chased growth with borrowed money will find the bill arriving just as the festive lights go out.

(The writer is with the Cholleti BlackRobe Chambers, Hyderabad, and writes on the economy, politics and law)