According to a research by Emkay Institutional Equities, the loan growth trajectory is predicted to decelerate down to 12–14% on-year during FY25–27E from the present ~16.5 percent YoY (21 percent inclusive of HDFC). The loan-to-deposit ratio (LDR), which is now at an 80 percent peak, is also predicted by the research to decline to 75 percent. It went on to say that, if left unchecked, the total deposit growth and, more specifically, the slowing retail deposit growth (including SA), might become a structural danger to India's long-term retail credit development narrative.

Furthermore, as per the Emkay research, several banks have lowered their surplus cash on hand to finance credit expansion in the last few months, which has slowed deposit growth and preserved profits. Nevertheless, it said, the majority of these levers have now been fully used up, and banks will now need to mobilize deposits in order to gradually support credit expansion. According to Emkay Institutional Equities, banks will likely continue to favor low-cost deposits, therefore in order for them to sustain credit expansion over the long term, they must accelerate deposit growth.

"The extended elevated rate cycle and, thus, higher funding cost coupled with rising asset-quality risk in unsecured retail loans contributing 12 percent of YTD credit growth has raised concerns about profitable lending," stated Anand Dama, Senior Analyst, BFSI, Emkay Global Financial Services. Lending institutions are terrified as a result of the RBI's new measures to stop the bank from expanding its unsecured and NBFC loan portfolio without restraint. Every bank will have to figure out how to prevail in the battle for customer deposits, or at the absolute least, survive it.

He went on, "Some of these solutions could include focusing on corporate salary, community banking, self-funding ratio, capturing corporate/SME customer flow via transaction banking/CMS and retail customer cash flow via wealth management, along with an emphasis on the expanding branch network (metro + SURU with a focus on the Hindi Heartland, given its strong growth potential)."

In order to mobilize retail deposits, private sector banks such as HDFC Bank, ICICI Bank, Axis Bank, IndusInd Bank, and IDFC Bank have identified their niche focus areas and are expanding their branches. Meanwhile, public sector banks, with the exception of SBI and BOB, are still lagging behind and may face long-term difficulties, according to Emkay Institutional Equities.

"The Indian banking sector is structurally in stronger shape to ride the retail credit growth story over the next decade, amid rising consumerism," stated Seshadri Sen, Head of Research and Strategist at Emkay Global Financial Services. The largest obstacle, meanwhile, would be finding a viable way to finance such expansion through retail deposits in the face of growing structural upheavals. In the fierce battle for retail deposits, PSBs could benefit in the short run, but PVBs will emerge victorious in the long run.

Over the last Ten Years, the Money Supply has Decreased

According to the research, there is now a shortage of liquidity since the growth of the Broader Money Supply (M3) and deposits in the Indian banking system have stabilized at a lower level (<15 percent) during the previous ten years, and for a few years, they have even fallen below 10 per cent. According to the statement, this is because the commercial sector's loan growth has been slowing down since FY14, and the banking sector's net foreign asset growth has decreased.

Long-term money supply growth will be contingent on sustained strong credit growth and an easing of monetary policy by the RBI. Emkay Institutional Equities, on the other hand, anticipates that the lag effect of the robust credit growth over the past two years combined with higher interest rates offered by banks should gradually reflect via some improvement in M3 and deposit growth in the near-medium term.