Why Indian private banks are betting big on term deposits in FY26: What Kotak Mahindra Bank, HDFC Bank, and ICICI Bank trends reveal

Private sector banks in India are recalibrating their funding strategies in fiscal year 2026 with a pronounced focus on term deposit mobilisation. This shift marks a strategic response to growing pressures on net interest margins, liquidity planning, and loan-to-deposit management. Kotak Mahindra Bank Limited, HDFC Bank Limited, and ICICI Bank Limited, among the country’s leading private sector lenders, have made visible moves in this direction. Their actions highlight a broader shift in the Indian banking sector—one that underscores the rising importance of balance sheet optimisation, liability-side planning, and deposit stickiness in a changing rate environment.

In Kotak Mahindra Bank’s Q2 FY26 results, term deposits were shown to have grown sharply, with average term deposits reaching ₹311,889 crore, a 20 percent year-on-year increase from ₹259,434 crore in Q2 FY25. This growth significantly outpaced the 8 percent increase in fixed-rate savings deposits and the 14 percent growth in current deposits. The bank’s CASA ratio remained steady at 42.3 percent, but the emphasis on term deposits suggested a conscious pivot toward a more stable and committed funding base. At the same time, Kotak Mahindra Bank’s cost of funds rose to 4.70 percent, while its net interest margin held at 4.54 percent. The bank’s credit-to-deposit ratio stood at 87.5 percent, reflecting a well-balanced approach to credit expansion and deposit accumulation.

What key factors are driving the aggressive growth of term deposits among Indian private sector banks?

Several factors are behind this coordinated push toward term deposits. First is the sustained pressure on net interest margins. As system-wide deposit costs continue to rise and CASA balances become increasingly competitive, term deposits offer a strategic hedge by locking in funding at predictable costs. Second, the tightening liquidity environment following Reserve Bank of India’s policy normalisation has made stable liabilities more valuable than ever.

Third, banks such as HDFC Bank Limited are responding to structural changes in their own balance sheets. Following its merger with HDFC Limited, the combined entity inherited a large loan book without a proportionate deposit base, pushing the loan-to-deposit ratio near the 100 percent mark. To reduce this imbalance and create a more sustainable funding model, the bank has begun to prioritise term deposits over lending expansion in the short term.

Fourth, private sector banks are also reacting to increased competition from fintech platforms and non-banking financial companies that offer high-yield fixed income substitutes. In this environment, offering competitive term deposits becomes essential to retaining and growing the customer base, particularly in the affluent and mass-affluent segments.

How are Kotak Mahindra Bank, HDFC Bank, and ICICI Bank executing their term deposit strategies in FY26?

Kotak Mahindra Bank Limited has been proactive in expanding its term deposit base. As of Q2 FY26, the bank had increased average term deposits by 20 percent year-on-year, significantly above the growth rate of other deposit categories. This surge was key to maintaining its CASA ratio above 42 percent while ensuring that its loan growth, which stood at 16 percent year-on-year, was backed by a stable funding base. The bank’s credit-to-deposit ratio of 87.5 percent indicates a deliberate balancing of credit expansion with deposit mobilisation.

HDFC Bank Limited, post-merger, has made term deposits a core focus of its liability strategy. In the March 2025 quarter, the bank revealed that its deposit growth had exceeded loan growth for the first time in recent memory, with deposits rising 5.9 percent versus a 4 percent rise in advances. The bank has also publicly stated its intent to bring the loan-to-deposit ratio back down to 85–90 percent by FY27. To do so, it is actively targeting long-tenure term deposits and cross-selling fixed deposits through its expanded retail network.

ICICI Bank Limited, while operating from a more stable balance sheet position, has also leaned into term deposits as part of a broader de-risking and liquidity planning framework. The bank has maintained a conservative credit expansion trajectory while ensuring that term deposits help provide a matched funding base for long-duration lending products, especially in home loans and infrastructure financing.

What are the implications of this term deposit focus for margins, funding costs, and asset-liability management?

While term deposits help stabilise funding and align liabilities with longer-tenure assets, they come at a cost. Unlike low-cost CASA deposits, term deposits often carry higher interest rates, which can compress net interest margins if not offset by higher asset yields. For Kotak Mahindra Bank Limited, this margin trade-off was visible in Q2 FY26. The cost of funds rose to 4.70 percent, putting upward pressure on liabilities, though the net interest margin remained healthy at 4.54 percent due to disciplined lending practices.

HDFC Bank Limited is also likely to experience some margin pressure as it continues to replace short-term borrowings with long-term deposits. However, this cost is considered acceptable in the context of long-term liquidity stability and better funding predictability. ICICI Bank Limited’s margin profile remains resilient, but analysts have flagged that rising term deposit concentration could cap margin upside in FY26 unless loan pricing sees concurrent adjustments.

From a risk perspective, term deposits reduce the reliance on volatile wholesale borrowing and improve liquidity coverage ratios. They are also seen as more durable sources of funding, especially during uncertain macroeconomic periods. However, asset-liability mismatches can occur if deposit tenures are not aligned with loan book maturities, making tenure management a key execution challenge.

What broader shifts in strategy does this reveal about the future of private banking in India?

The rising emphasis on term deposits signals a clear shift in private bank strategy—from growth-through-credit to growth-through-liability optimisation. In past cycles, Indian private banks relied heavily on lending expansion to drive topline growth. But as margins compress and capital becomes more costly, banks are turning inward to re-engineer their deposit mix, improve liquidity buffers, and reduce funding risk.

This strategic recalibration also reflects increasing investor and regulatory scrutiny on balance sheet resilience. Loan-to-deposit ratios and cost-of-funds metrics are now as closely watched as credit growth and asset quality. Banks that show discipline on the funding side are being rewarded with higher investor confidence and stronger relative valuations.

Furthermore, the pivot to term deposits underscores the growing sophistication in liability-side planning. Banks are segmenting customer profiles, tailoring deposit products, and using data analytics to predict churn, renewal, and tenure behaviours. This is a marked evolution from the traditional view of deposits as passive balance sheet entries. In FY26, they are becoming active levers for profitability and risk control.

What risks should analysts and institutional investors monitor as term deposit dependence rises?

While the strategic case for term deposits is clear, there are risks that investors and analysts will need to watch closely. The first is margin compression. As banks raise more high-cost deposits, they may face pressure on spreads, especially if lending rates remain static or decline due to competitive intensity.

The second is liquidity concentration. A large pool of term deposits maturing in a short window could create renewal pressure or interest rate risk if re-priced at unfavourable levels. Banks will need to actively manage the duration profile of these deposits to avoid cliff risks.

Third, there is growing competition from fintech platforms, mutual funds, and fixed-income product providers. These players are increasingly targeting deposit-like behaviour through systematic investment plans, debt funds, and structured offerings. Banks will need to innovate on customer experience, ease of access, and digital onboarding to defend their deposit franchise.

Fourth, macroeconomic shifts such as Reserve Bank of India’s monetary policy reversals or external liquidity shocks could change the cost-benefit analysis of term deposits overnight. If rates fall and banks are left with high-cost liabilities, profitability could be impacted, especially for those without matched lending strategies.

Why the term deposit strategy could define Indian private banking’s FY26 playbook

Kotak Mahindra Bank Limited, HDFC Bank Limited, and ICICI Bank Limited are not simply reacting to short-term funding gaps. They are proactively reshaping their liability structures in anticipation of tighter liquidity, evolving customer behaviour, and macro uncertainties. The growing emphasis on term deposits reflects this new strategic orientation—one that places funding resilience, balance sheet stability, and margin protection at the centre of competitive banking in India.

Whether this term deposit play becomes a long-term structural shift or a tactical FY26 manoeuvre will depend on how effectively these banks align deposit mobilisation with lending strategy, margin management, and regulatory capital planning. For now, it is clear that in Indian private banking, the liability side is no longer playing second fiddle. It is the new frontline of growth.