India's three largest state-owned banks have disclosed a structural imbalance in their latest quarterly results. Punjab National Bank's loans grew 12.85% against deposit growth of 8.52%. Bank of India saw loans surge 18.64% while deposits lagged at 14.92%. Bank of Baroda grew loans at 17.42% against deposit growth of 13.81%. Across all three, the credit-deposit gap has widened past 350 basis points.
The root cause is a generational shift in household savings behavior. For decades, bank fixed deposits were the primary destination for middle-class savings. Today, retail capital is moving en masse into mutual funds, SIPs, and direct equity holdings, chasing higher returns than FDs can offer. This migration is not cyclical—it reflects a structural reallocation of where Indians are choosing to save.
To fund loans and support corporate credit expansion across a growing economy, PSU banks cannot simply stop lending. Instead, they are turning to expensive, short-term wholesale funding via Certificates of Deposit to bridge the deposit shortfall. This shift in funding mix will compress their Net Interest Margins in coming quarters as the cost of capital rises.
The paradox is stark: credit growth is normally a sign of economic health and lending momentum. But credit growth without matching deposit growth is essentially leverage—borrowed stability that depends on favorable conditions. If the retail migration to equities persists, PSU banks face a durable structural challenge, not a temporary liquidity squeeze.
