India's Banking Crossroads: How Deposit Dynamics & Sector Shifts Create a Bull Market in Select Banks

The slowdown in India’s bank loan growth, now stretching into its eighth consecutive quarter, has sparked fears of a credit crunch. But beneath the surface lies a transformative opportunity for investors. Regulatory pressures, shifting household investment habits, and strategic shifts in deposit-credit management are reshaping the sector—creating a stark divide between winners and losers. This is no time to retreat; it’s a moment to lean into banks positioned to thrive in this new landscape.

The Slowdown Isn’t All Bad—It’s a Strategic Reset

India’s banking sector is in the throes of a forced recalibration. Loan growth for the six largest banks dropped to 11.29% in FY2025, down from 21.18% a year earlier. But this isn’t just about weaker demand. Regulatory actions, such as the RBI’s 25% risk weight hike for unsecured loans, have intentionally tightened credit for risky sectors like consumer lending. Meanwhile, households are shifting away from debt, favoring equities—a trend that’s cut retail loan demand.

Yet this isn’t a death knell for banks. It’s a chance to focus on sustainable, low-risk lending. The real action lies in deposit dynamics and sector-specific shifts:

Private Banks: The Deposit Mobilization Edge

While public sector banks (PSBs) grapple with margin pressures and high credit-deposit ratios, private banks are weaponizing deposits. Consider HDFC Bank, which reduced its credit-deposit ratio to 107.26% by June 2024—down from 108.94%—by aggressively marketing high-yield deposit schemes. This “fortress balance sheet” approach ensures liquidity to fund priority sectors like infrastructure and affordable housing, which are government-backed and carry lower risk.

Tip: Look for banks with CASA (Current Account Savings Account) ratios above 40%. These institutions have stable, low-cost deposits to fund growth without relying on expensive short-term borrowing.

Sector Shifts: Infrastructure & Retail Are the New Frontiers

The RBI’s liquidity measures and fiscal push for infrastructure spending are creating goldilocks conditions for banks with exposure to priority sectors.

1. Infrastructure Lending:
   With the government targeting $1.5 trillion in infrastructure investment by 2026, loans for roads, railways, and renewable energy projects offer steady returns with minimal default risk. PSBs dominate here, but HDFC Bank’s merger with Lakshmi Vilas Bank (LVB) has given it a $2.4 billion credit boost, positioning it to compete.

2. Retail Banking:
   Even as households shift to equities, demand for secured loans (home mortgages, auto finance) remains robust. Private banks like ICICI and Axis Bank, with CASA ratios near 45%, are best placed to capture this niche.

Beware the Service Sector Debt Trap

Not all sectors are equal. The RBI’s survey shows tightening credit terms for mining, but the real danger lies in over-leveraged service sector loans. Firms in real estate and hospitality—already stressed by high interest rates—are now facing a slowdown in consumer spending. Avoid banks with excessive exposure here.

The Investment Playbook: Act Now, but Be Selective

The window to buy is narrowing. Here’s how to capitalize:

1. Buy Banks with CASA >40%:
   Focus on HDFC Bank, ICICI Bank, and Axis Bank. Their deposit strength shields them from liquidity risks and fuels low-cost lending.

2. Dive into Infrastructure-Linked PSBs:
   While PSBs lag in CASA ratios, State Bank of India and Punjab National Bank are beneficiaries of government guarantees on infrastructure loans. Pair these with private banks for balance.

3. Avoid Service Sector Plays:
   Steer clear of banks like Bandhan Bank or IndusInd Bank, which have significant exposure to consumer and real estate debt.

Conclusion: The Slowdown is a Setup for Outperformance

The loan growth slowdown isn’t a crisis—it’s a reset. Banks with strong deposits, focus on priority sectors, and discipline in risk management are primed to outperform as the economy stabilizes. The RBI’s liquidity support and fiscal push mean this isn’t a temporary dip but a structural shift.

Investors who act now—by loading up on CASA-rich banks and infrastructure plays—will capture a multi-year bull run. This is the time to bet on India’s banking renaissance.

The stakes are high, but the rewards are clearer than ever.