Banks Face Liability Reckoning as Deposit Composition Shifts: Retail Competition Forces Major Strategy Pivot

Banks Face Liability Reckoning as Deposit Composition Shifts: Retail Competition Forces Major Strategy Pivot​

India's banking sector is undergoing a profound structural change in its deposit composition. A report by Crisil highlights that lenders are now compelled to completely rethink their liability strategies amidst intense competition for retail deposits and shifting customer preferences toward higher-yielding savings products. This evolution underscores the dynamic pressure faced by financial institutions across the board.

Structural Shifts in Bank Deposit Composition​

In fiscal 2026, total deposits within India’s banking sector expanded robustly by 13.5 percent year-on-year, reaching approximately Rs 262 trillion. However, this growth occurred while credit expansion continued to outpace deposit creation. The resulting elevated credit-deposit ratio stands at over 81 percent, indicating a specific internal pressure point for the financial sector.

The shift is most evident in the evolving mix of deposits. Banks are increasingly pivoting toward term deposits. The share of these longer-term deposits climbed significantly to 61.0 percent in FY26 from 58.0 percent in FY19. Conversely, Current Account Savings Account (CASA) deposits saw a decline, falling to 39 percent from 42 percent during the same period.

The Moderation of CASA Ratios​

The moderation observed across different lender categories is largely attributed to customer preference for higher-yielding deposit products and the increasing financialization of savings habits. This trend reflects an environment where banks must compete fiercely to retain deposits.

Private sector banks experienced a particularly sharp decline in their CASA ratio, which settled at 38 percent in FY26 compared to 42 percent in FY19. Public banks, however, maintained slightly better stability, with their CASA ratio moving down to 39 percent from 41 percent over the same timeframe.

The report further noted that this sharp trend among private institutions was influenced by specific market events, including the merger of a large housing finance company with a private sector bank in fiscal 2024, which fundamentally altered the liability mix for the merged entity.

Non-Household Segments Gain Ground in Deposit Base​

While households remain the most significant contributor to the banking system's overall deposit base, their dominant share has seen a minor dip. The household segment’s contribution fell to 59.3 percent in FY26 from 63.2 percent in FY19.

In contrast, non-household segments, comprising both financial and non-financial corporations, experienced growth. Their share of the deposit base increased substantially, moving up to 26.3 percent from 20.5 percent. This institutional increase was largely driven by heightened corporate participation across various banking segments.

Household Savings Remain Crucial for Low-Cost Funding​

Despite the rise in non-household contributions, the report emphasizes that households remain the essential bedrock of low-cost funding for banks. The household segment continues to occupy nearly 70 percent of all CASA balances. Financial corporations and non-financial corporations contributed approximately 22 percent toward total CASA balances.

This data suggests that while deposit bases are diversifying, the sustainability of a bank's CASA franchise is fundamentally tied to maintaining strong linkages with stable household savings. The current market environment demands that banks closely monitor these liability dynamics.

Policy Rate Transmission Limited by Deposit Competition​

The intense competition for deposits has restricted how effectively policy rate cuts can be transmitted through the banking system to depositors. Even though there was a cumulative 125 basis points (bps) reduction in the repo rate between February 2025 and March 2026, banks lowered fresh term deposit rates by only around 48 bps. This reality underscores the delicate balance between macroeconomic monetary policy and competitive banking practices.