Bank lending stays strong in Q1, outpacing deposit growth

Banks are struggling to raise deposits fast enough to support demand for loans

- Subhana Shaikh & Astha

Bank lending continued to outpace deposit growth in the June quarter, widening the funding gap as banks struggle to raise deposits fast enough to support demand for loans.

Early business updates indicate that credit growth remained resilient despite headwinds from the US-Iran war, thereby increasing pressure on banks to accelerate deposit mobilisation to sustain the pace of lending, industry experts said.

Most large and mid-sized banks posted year-on-year credit growth between 12.9% and 21.3% whereas the figure was as high as 25.5-26.5% for smaller banks such as Jammu and Kashmir Bank and Dhanlaxmi Bank. Deposit growth, by contrast, for mid-sized and large banks was in a range of 7.0-14.9%, which went up to 16.8-17.1% for some smaller banks, initial business updates by lenders showed. Union Bank was the outlier, with its loans growing 12.5% year-on-year in Q1 (April-June 2026) and deposits growing significantly slower at only 3.5%.

“The strong credit growth has been supported by demand from corporates, which have shifted to bank borrowings amid rise in corporate bond yields as well as elevated cost of external commercial borrowings amid higher hedging costs,” said Anil Gupta, senior-vice president and co-group head of financial sector ratings at Icra Ltd.