Banks Expected to Increase Bond Issuances in Q4 Amid Rising Credit-Deposit Gap
Banks are expected to increase corporate bond issuances in Q4 FY25 as the credit-deposit ratio hits a record 81.75%. With bank credit growing 11.4% against deposit growth of 10.1%, lenders face funding pressure despite 10-year bond yields reaching 6.68%, the highest in 10 months. Certificate of deposits outstanding rose 15% to ₹5.68 lakh crore, but their short tenure limits effectiveness for long-term funding needs.
*this image is generated using AI for illustrative purposes only.
Banks and financial institutions are expected to significantly increase their corporate bond issuances during the fourth quarter of the current financial year, as lenders face mounting pressure from a widening gap between credit and deposit growth. Despite rising bond yields, market participants believe banks will tap the debt market to address funding challenges stemming from tight systemic liquidity conditions.
Record High Credit-Deposit Ratio Drives Funding Needs
The banking system is experiencing unprecedented strain, with the credit-to-deposit ratio climbing to an all-time high of 81.75% as of December 31. This metric highlights the growing imbalance between loan demand and deposit mobilization, forcing banks to explore alternative funding sources.
| Parameter: | Value |
|---|---|
| Credit-Deposit Ratio: | 81.75% |
| Outstanding Deposits: | ₹248.50 lakh crore |
| Outstanding Credit: | ₹202.00 lakh crore |
| Bank Credit Growth: | 11.4% |
| Deposit Growth: | 10.1% |
Bond Yields Remain Elevated Despite Rate Cuts
Bond market conditions present a challenging environment for issuers, with the 10-year benchmark government bond yield ending at 6.68% on Monday, marking its highest closing level in 10 months. Notably, yields have declined by merely 12 basis points since the easing cycle commenced, despite the Reserve Bank of India implementing a substantial 125 basis point rate cut since February 2025.
"Market dynamics have clearly shifted in the current cycle. Bond yields have hardened despite a reduction in the policy repo rate, reflecting factors beyond monetary easing," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap. "While systemic liquidity is comfortable, transmission into long tenor bond yields has remained limited."
Upcoming Issuances and Market Activity
Several major lenders are preparing to enter the bond market in the coming months. Indian Overseas Bank has announced plans to raise ₹1,000.00 crore through a 10-year bond issuance on January 22. Market experts anticipate that prominent public sector lenders including State Bank of India, Bank of Maharashtra, Union Bank of India, and Punjab National Bank will also tap the bond market during this quarter.
Certificate of Deposits Provide Short-Term Relief
Banks have increasingly turned to certificate of deposits as an interim funding solution, with outstanding CD issuances rising 15% to ₹5.68 lakh crore at the end of December 2025, compared to ₹4.94 lakh crore a year ago. However, these instruments typically carry short tenors ranging from one to three months, or at most under a year, limiting their effectiveness for asset-liability management given the longer duration of banks' loan portfolios.
"Banks will have to borrow sometime soon in the future, because there is an uptick in loans but deposits are not picking up," noted Soumyajit Niyogi, director at India Ratings Research. The structural preference for long-term funding makes bond issuances the most viable option for banks, even in the current elevated rate environment, as they seek to match the maturity profile of their assets and liabilities.
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