Banks Bet on Loans, Not Bonds — Credit Surges to a Record High 04Mar2026
(The views expressed here are for information purposes only and should not be construed as a recommendation or investment advice. While the author is a CFA Charterholder with nearly 25 years of experience in financial markets, this content is intended to share general insights and does not constitute financial guidance. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)
India’s banks are in the middle of a lending surge. Between Mar2025 and Dec2025, scheduled commercial banks expanded gross credit by Rs 20.8 lakh crore, including a striking Rs 12.5 lakh crore jump in the Oct-Dec2025 quarter alone.
Deposits grew strongly too, but instead of channeling fresh funds into government bonds, banks deployed almost all of it into loans, pushing the credit-to-deposit ratio to a record high.
This shift matters. When banks choose loans over bonds, it reshapes liquidity conditions, influences bond yields and signals where economic momentum truly lies.
The latest data suggest that the current cycle is being powered less by large industrial borrowing and more by retail and services credit — a consumption-led expansion that is quietly redefining the balance sheets of India’s banking system.
1. Credit Over Bonds:
The shift is clear in the numbers.
| SCBs in India | Agg Deposits | Investments | Credit | change in agg dep | change in inv | change in credit |
| Rs lakh crore | ||||||
| Dec.2025 | 248.57 | 68.84 | 203.21 | 10.75 | 0.29 | 12.47 |
| Sep.2025 | 237.83 | 68.56 | 190.73 | 3.57 | 1.59 | 5.87 |
| Jun.2025 | 234.26 | 66.96 | 184.86 | 8.45 | -0.01 | 2.42 |
| Mar.2025 | 225.81 | 66.97 | 182.44 | NA | NA | NA |
| Change in 3 quarters (b/w Mar2025 & Dec2025) | 22.77 | 1.87 | 20.77 | |||
Between Mar2025 and Dec2025, banks overwhelmingly prioritised lending over government securities. Aggregate deposits rose by Rs 22.8 lakh crore in this period, of which Rs 20.8 lakh crore was deployed into loans (over 90 per cenet of increase in deposits), while only Rs 1.9 lakh crore went into government securities.
This pushed the Credit Deposit Ratio (CDR) to a record 81.7 per cent by Dec2025, while the Investment Deposit Ratio (IDR) slightly declined to 27.7 per cent, indicating that banks were holding a smaller share of deposits in investments (government securities).
After a brief liquidity bulge in Jun2025, banks quickly redeployed funds, pushing the credit-to-deposit ratio above 81 per cent and keeping bond holdings near regulatory comfort levels.
Between Mar2025 and Dec2025, the 10-year government bond (G Sec) yield in India moved in a narrow range, starting at 6.59 per cent at the end of Mar2025, dropping to 6.25 per cent in May2025, and returning to 6.59 per cent by the end of Dec2025.
The brief dip in May offered a small window of lower borrowing costs, but for most of the period, yields remained elevated compared with previous months.
Higher yields made fresh bond purchases attractive in theory, but banks faced the risk of mark-to-market losses on older holdings and had seemingly more lucrative opportunities in lending.
This partly explains why banks largely kept their bond portfolios stable while aggressively deploying deposits into credit.
The result is a banking system that has maximised the deployment of deposits into loans, reflecting strong credit demand and the relative attractiveness of lending in a post-pandemic economy.
The surge in lending, particularly to households and the services sector, underscores why credit growth has outpaced deposit growth, while bond holdings have stayed close to regulatory minimums.
2. Retail and Services Lead the Way:
Between March and December 2025, the incremental deployment of bank credit was broad-based but clearly tilted toward consumption and services.
Personal loans accounted for the largest share of new lending, rising by Rs 6.77 lakh crore and contributing about 32.5 percent of the total increase. This includes housing, vehicle loans, gold loans and other retail credit, underscoring the strength of household borrowing.
Services was the second-largest contributor, with credit expanding by Rs 5.61 lakh crore, or 27 percent of the total increase. This category spans NBFCs, trade, real estate, tourism and professional services, suggesting that much of the momentum is flowing through service-oriented and intermediary sectors.
Agriculture and MSME each saw credit growth of Rs 2.22 lakh crore, accounting for about 10.7 percent each of the incremental lending. This indicates steady expansion in priority and small-business segments.
Large industry saw a relatively modest rise of Rs 1.47 lakh crore, just 7.1 percent of the total increase, highlighting that the current credit upswing is not being driven primarily by big-ticket corporate borrowing.
Deployment of Gross Bank Credit by Sectors >
| Sector | change | share in |
| change | ||
| Rupees in lakh crore | ||
| Bank credit (total) | 20.79 | 100.0% |
| Major sector | ||
| Personal loans# | 6.77 | 32.5% |
| Services* | 5.61 | 27.0% |
| Agriculture | 2.22 | 10.7% |
| MSME | 2.22 | 10.7% |
| Large industry | 1.47 | 7.1% |
| total | 18.28 | 87.9% |
# personal loans incl loans against jewellery, housing, vehicle loans, etc.
* Services include NBFCs, trade, real estate, prof services, tourism, etc.
Data source: RBI Monthly Bulletin - Deployment of Gross Bank Credit by Major Sectors
3. Key Ratios of Banking Industry
Chart showing key ratios for Scheduled Commercial Banks (SCBs) in India over recent quarters and fiscal years (FY 2013-14 till now), showing how banks balance their investments, lending and liquidity requirements >
Data source:
RBI Monthly Bulletin - Select Economic Indicators (data of IDR and CDR from Mar2024 include impact of merger of HDFC Ltd with HDFC Bank Ltd in Jul2023)
What the above chart reveals:
The above table presents key ratios for Scheduled Commercial Banks (SCBs) in India over recent quarters and fiscal years, showing how banks manage the balance between lending, investment and regulatory liquidity requirements.
The Investment Deposit Ratio (IDR) and Credit Deposit Ratio (CDR) together indicate how banks allocate funds between investing in government securities and lending to borrowers.
A review of the data reveals clear trends over the past decade. IDR and CDR were relatively low in Mar2019, at a time when SLR and CRR were slightly higher, reflecting tighter liquidity requirements that limited lending.
Over subsequent years, as SLR and CRR gradually declined, banks gained more flexibility, enabling both IDR and CDR to rise steadily.
There was a sharp dip during the COVID-19 period, when credit growth slowed amid economic uncertainty, but the trend reversed strongly in the post-pandemic years.
In the past two to three years, this shift has accelerated. The CDR has climbed from 72.2 per cent in Mar2022 to 81.7 per cent by Dec2025, indicating that credit growth is consistently outstripping deposit growth.
At the same time, the IDR has slightly declined from 28.7 per cent to 27.7 per cent, showing that banks are holding a smaller share of deposits in investments.
CRR has also fallen from 4.0 per cent in Jun2025 to 3.0 per cent in Dec2025, freeing up liquidity for lending, while SLR has remained stable at 18 per cent, allowing banks to maintain regulatory buffers without expanding bond holdings.
Overall, the table tells the story of a banking system increasingly favoring loans over bonds.
With lower CRR and SLR, banks are able to maximise lending, particularly to households and services, while keeping investment in government securities closer to the regulatory minimum.
This reflects both stronger credit demand and a structural shift in how Indian banks deploy their deposits.
Definitions:
Investment Deposit Ratio (IDR) is the percentage of total deposits that banks invest in government securities.
Credit Deposit Ratio (CDR) is the percentage of total deposits that banks have lent out as loans to borrowers.
Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits that banks must maintain in liquid assets like government bonds.
Cash Reserve Ratio (CRR) is the portion of deposits banks are required to keep as cash reserves with the Reserve Bank of India, which cannot be used for lending or investment. Banks earn zero interest on this.
How do Regulatory Ratios Impacted Bank Lending and Investing Over the Decade
Between Mar2014 and Dec2025, regulatory requirements eased significantly, with CRR plus SLR falling from 27 per cent to 21 per cent.
Despite this, the Investment Deposit Ratio declined by only about one percentage point, as banks continued to hold a sizeable portion of deposits in government securities for liquidity and risk management.
At the same time, the Credit-to-Deposit Ratio rose nearly 4 percentage points, showing that banks increasingly prioritised lending over bonds, supported by strong credit demand. Regulatory relief alone does not automatically boost lending—banks balance liquidity risk and returns when deploying funds.
The merger of HDFC Ltd with HDFC Bank in Jul2023 may have slightly affected IDR and CDR post-merger, as the combined balance sheets changed the composition of deposits, loans and investments.
Since 2014, the RBI has slowly 'unlocked' the vault by lowering SLR and CRR. Banks didn't use that extra freedom to buy more bonds; they used every bit of it to fund the lending boom.
4. Concluding Remarks
With the credit-to-deposit ratio now above 81 per cent, banks have effectively maximised the deployment of deposits into loans, while keeping bond holdings close to regulatory minimums.
This has implications for bond market liquidity and short-term yields and could influence government borrowing costs. Looking ahead, banks may take a breather in lending over the next two quarters unless deposit growth or credit demand picks up.
The pace and composition of future lending will depend on household and services demand, corporate borrowing needs and broader liquidity conditions, including bond yields and regulatory ratios.
I wrote this blog to demystify how Indian banks manage their funds, showing how regulatory ratios, credit growth and bond market dynamics influence the balance between lending and investing—areas that can seem complex to many investors.
All data and analysis in this blog are based on publicly available sources and the author’s interpretation; and do not constitute financial advice.
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References:
Bloomberg article 26Feb2026 Indian Banks Snap Up Bonds as Holdings Approach Regulatory Floor
For the past 20 years, RBI has not been paying any interest to CRR to banks.
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