Bank Loan-To-Deposit Ratios To Normalise In FY27, Says India Ratings

Deposit growth lagging credit growth, leading to elevated loan-to-deposit ratio, will persist in fiscal 2026, but may normalise by fiscal 2027, India Ratings and Research said in its outlook on Tuesday.

"We see LDR (loan-to-deposit ratio) normalising to around 70% levels in FY27," Karan Gupta, head and director financial institutions at India Ratings said.

Since 2021-22, deposits in the banking system have continued to lag the system's credit growth with average lag of 416 basis points, leading to LDRs gradually inching up to 80.4% in the first half of the current financial year from 70.0% in 2020-21.

"In Ind-Ra’s opinion, elevated LDRs might constrain the loan growth of banks in the medium term," the rating agency said in its report.

Apart from elevated LDR, the potential impact of draft norms on liquidity coverage ratio, expected higher provisioning for the infrastructure sector and the introduction of expected credit loss norms will pose further challenges on the banking sector.

India Ratings expects an impact of 5-15 bps on banks' net interest margins from the draft LCR norms and said that "if there is any time to implement ECL norms on banks is right now" as capital buffers remain strong.

On profitability, India Ratings expects some moderation in the next financial year, with net additions (gross slippages less upgrades and recoveries) to increase in 2024-25 and 2025-26 to 58 bps and 66 bps, respectively.

This is likely to increase credit costs. Some moderation in return on assets is also expected, the rating agency said.

It has cut its 2025-26 rating outlook to deteriorating from stable on personal loans, unsecured business loans, microfinance institutions segment as it expects delinquency pressure is likely to persist.

High reliance on the unsecured loan segment amid increased regulatory oversight has led the rating agency to cut the non-banking financial companies sector's credit growth outlook to 18.5% on year in 2025-26 from 20% in 2024-25.

Funding will remain a challenge for the sector in next financial year as bank lending to NBFC sector has come down. NBFCs will continue to opt for alternative funding avenues, such as external commercial borrowings, bond market and short-term money market instruments.

Post the gold loan advisory by the Reserve Bank of India to lenders, India Ratings expects these gold financiers' operating costs to increase by 10-12% on year to meet the RBI's requirements.

For the microfinance institutions, India Ratings expects the stress of borrower deleveraging to play out until the next two-three quarters and expect the situation to stabilise only in the second half of fiscal 2026.