Credit growth has picked up over the past few months, but banks have struggled to grow their deposit base to match it. Growth in current account and savings account (CASA) deposits has particularly slowed, with retail investors now having a range of avenues to put their savings in, such as stocks, mutual funds, and other types of fixed deposits.These avenues provide much better returns than traditional CASA accounts and have become more accessible over time due to digitisation and regulatory bodies’ simplification of norms. CASA deposits are low-cost for banks and are used to fund loans, the major source of revenue. They are considered a reliable and “sticky” source of funds for banks due to low churn, as such depositors aren’t likely to shift this money to other banks easily.Due to this mismatch in growth, the gap between credit and deposit growth has widened from 1.8 percentage points in December to 5.4 percentage points as of June 15, according to data from the RBI. This has led to the credit-to-deposit ratio of banks — which is the percentage of a bank’s deposits deployed as loans — widening to 82.5% as of June 15 from around 75% in mid-2025.This means for every Rs 100 of deposits, banks deploy Rs 82.5 for loans, which squeezes profits after accounting for operational, marketing, funding and other costs.The slowdown was also noted in the Reserve Bank of India’s Financial Safety Report released last week. “Even as the banking system’s resilience remains intact, funding is emerging as a key challenge. Banks’ liability profile is shifting from low-cost current and savings accounts (CASA) to higher-cost term deposits and CDs (certificate of deposit), pushing up the marginal cost of funds,” the report noted.Banks shifting to other funding avenuesAs CASA deposits have slowed, banks have shifted to other sources of funds such as term deposits and CDs.“The growth in term deposits continued to outpace that of current and savings account deposits, indicating sustained preference for interest-bearing term deposits,” RBI’s report said.Story continues below this adTerm deposits refer to financial instruments where one locks in their money for a particular tenure to earn interest in return. This includes retail options such as fixed and recurring deposits. A CD is a type of term deposit used by corporates and institutions to raise money through the money markets.Also Read | HDFC Bank raises $750 million abroad: Will other Indian banks follow suit?“CASA is the low-cost liability available to banks. Additionally, on a behavioural pattern perspective, CASA can support creation of longer-tenure assets. CDs, on the other hand, have historically been used to manage shorter-duration liquidity by banks,” said Rohan Mandora, associate director at Equirus Securities.As a result, the share of CASA in the total deposit base of the banking system has fallen to around 39% from a peak of around 44% in FY22 (during the post-Covid liquidity boom). Meanwhile, the share of term deposits has inched up to all-time highs of over 61% from around 56% in FY23.“CASA deposits have been under pressure for the past three years. As indicated by RBI, the 5-year average of the share of CASA in incremental deposits has been 40.2%. However, it was 21%/23%/33% in FY24/FY25/FY26,” according to Mandora of Equirus.Story continues below this adRBI’s recent measures to attract foreign inflows have also led banks to aggressively hike interest rates across foreign currency non-resident (FCNR-B) offerings, which are classified under term deposits.Why is it a concernCASA deposits have always been a reliable funding source for banks due to their low cost (around 3-4% interest rate) and “stickiness”. Term deposits and CDs, on the other hand, are much higher-cost (7-8% interest rate) options that ultimately squeeze the margins of banks.“CDs are wholesale, price-sensitive money with typical tenors of 3-12 months, whereas CASA is granular, behaviourally sticky retail money. In a tight-liquidity phase, CD rollover costs can spike quickly,” said Yuvraj Choudhary, research analyst at Anand Rathi Institutional Equities.While banks have largely managed to maintain robust financial growth and protect their net-interest margins (NIM) so far, this increased reliance on higher-cost shorter-term funds has already started to seep in.Story continues below this adThe likes of SBI, HDFC Bank, and Canara Bank, among others, saw their NIMs fall in the January-March quarter.The impact has been limited due to the low interest rate environment currently after the RBI slashed the repo rate by 125 basis points in 2025. This rate influences the interest rates across the entire banking system.Also Read | How NRIs could make a killing after banks hike FCNR(B) deposit ratesDuring a low interest rate cycle, banks are able to offer lower rates to depositors, providing some breathing space.“On funding costs, the pressure is visible but contained. The current rate-cut cycle works in banks’ favour. CDs and bulk term deposits reprice downward the fastest, so short-term wholesale reliance is cheapest to carry precisely now. The risk flips when the rate cycle turns,” said Choudhary.Story continues below this ad“Incrementally, some banks have marginally increased their term deposit rates in Q1. We expect the impact of higher share of bulk deposits to flow into cost of funds during 2HFY27,” according to Mandodra.Experts also believe the sluggish CASA growth is cyclical in nature after the post-Covid boom in liquidity due to steps by the central bank.“We believe this is more cyclical in nature and linked to overall liquidity in the system. With most banks showing little difference in asset quality, liability franchise quality is becoming the key competitive moat in Indian banking,” an analyst at a domestic firm said.Thus, while banks have found shorter-term funding solutions as CASA growth has dried up, the over-reliance on such temporary fixes is a double-edged sword.Story continues below this adWhile it helps manage liquidity and fund the booming credit growth for now, a hike in interest rates by the RBI or an external crisis may hit the sector hard if CASA growth is not rejuvenated.