IDFC First Bank deposit dip in Q4: FY27 targets explained

Deposit growth slows in March quarter

IDFC First Bank’s deposit growth moderated in the March quarter, a change the bank’s management described as planned rather than demand-led. In an interview with ET Now after the bank’s Q4 results, MD and CEO V Vaidyanathan said the slowdown was “deliberate” and “temporary”, and that early trends already show a reversal. The bank reported 17% year-on-year deposit growth in Q4, lower than its usual 20%-plus trajectory. Sequentially, deposit growth in the quarter was flat.

The management’s messaging matters because deposits are central to a bank’s growth and margin trajectory. A dip in deposit momentum typically raises questions on funding costs, competition for liabilities, and the ability to sustain loan growth. In this case, the CEO linked the temporary slowdown directly to a conscious pricing move. The bank also reiterated a medium-term plan focused on retail deposit mobilisation, operating leverage and a gradual easing of credit costs.

What changed: deposit rates were cut

Vaidyanathan attributed the Q4 slowdown to a reduction in deposit rates during the quarter. IDFC First Bank cut deposit rates from 7% to 6.5%, and in some buckets, rates were reduced by as much as 200 basis points. Such repricing can impact near-term inflows as rate-sensitive deposits react quickly, especially when competitors maintain higher rates.

The bank’s stance was that the trade-off was intentional. By lowering rates, the bank aims to reduce the cost of funds over time, supporting profitability once the deposit base reprices. Management also indicated that the slowdown was not being treated as a structural issue. Instead, it was framed as a short-term consequence of a pricing decision, with an expectation that growth will normalise as the bank rebuilds momentum.

April signals and the FY27 deposit growth goal

On the recovery, the CEO pointed to April data indicating strong deposit traction. He said the bank expects to return to 20% annual deposit growth in FY27. He also linked this to a longer track record, stating the bank has delivered 20% deposit growth for seven consecutive years.

The immediate takeaway is that management believes the liability franchise has not weakened, and that Q4 was a pause linked to rate rationalisation. If deposit momentum sustains after rate cuts, it can signal improving franchise strength, particularly in granular retail deposits where service quality and product experience can offset price competitiveness. The bank has highlighted service levels and digital technology as key drivers behind its retail deposit scaling.

Reported deposit mix and asset quality snapshot

Alongside the Q4 discussion, the disclosed metrics point to continued growth in the deposit base and a rising share of granular liabilities. Customer Deposits were reported at ₹2,69,094 crore, up 23.4% year-on-year. CASA Deposits were ₹1,38,583 crore, up 26.8% year-on-year. Net NPA stood at 0.52%, higher by 4 basis points year-on-year.

These data points suggest that even with a quarter of slower growth, the liability base has expanded meaningfully on an annual basis, with CASA growth outpacing overall deposits. For investors, the mix is important because CASA is typically a cheaper and more stable funding source than term deposits. The rise in Net NPA, while small in absolute terms, remains a metric the market tracks closely, particularly given stress in parts of unsecured lending across the sector.

Cost of funds and operating leverage: management’s focus

Management expects the cost of funds to decline from here, supported by the deposit rate cuts and repricing dynamics. The bank also said it is witnessing improving operating leverage, a key ingredient in the path to better profitability. In FY25, total business (loans plus customer deposits) grew 22.7% year-on-year, while operating expenditure rose 16.5% year-on-year.

This gap between business growth and cost growth is typically interpreted as a positive trend if it can be sustained. It indicates the bank may be moving from an investment-heavy phase to a phase where scale benefits show up in the cost-to-income profile. Management has also spoken previously about opex moving to a slower growth path as investments mature.

Credit costs: expectation of improvement as microfinance stress fades

For FY27, Vaidyanathan said the bank expects credit costs to fall further. He stated that the microfinance stress that weighed on the book has largely played out. Separately, the bank has disclosed that its microfinance portfolio declined 36.9% year-on-year in the quarter ending June 30, 2025, reducing its share in the overall loan book from 6.3% to 3.3%.

The bank has also indicated that outside microfinance, performance has been steadier. As of June 30, 2025, the bank reported GNPA at 1.97% and NNPA at 0.55%. While these figures relate to a different reporting period than the March-quarter discussion, they add context to management’s view that the stress is more concentrated and is being managed through provisioning and portfolio adjustments.

West Asia risk: watching second-order effects, not yet visible

On macro risks, Vaidyanathan addressed potential second-order impacts of the West Asia crisis on SME and microfinance borrowers. He pointed to possible channels such as higher input costs, raw material price pressure, and working capital strain. His assessment was that there was no visible impact as of Q4, and that early Q1 FY27 numbers looked “clean” as well.

At the same time, management signalled it is not treating the situation lightly. The bank said internal stress-testing and board-level scenario simulations are underway. Decisions are being made on which sectors to slow down and which to grow, based on these scenarios. The CEO said, “As of now there is no impact - not even in the quarter that is going on,” while adding that it is something to watch carefully.

Medium-term expansion plan: deposits, loans and branches

Beyond the near-term commentary, IDFC First Bank has laid out medium-term targets that centre on deposit-led growth. The bank plans to grow deposits at a compounded annual growth rate (CAGR) of 25% to reach ₹585,000 crore by March 31, 2029. It has also cited projected loan growth of approximately 20% annually over the next five years, with loans and advances projected to grow at a CAGR of 20.3%.

Distribution expansion is part of the strategy. The bank targets expanding its branch network to 1,700-1,800 by March 2029. In addition, it announced a ₹7,500 crore equity capital raise, with the CEO stating that capital adequacy would be 17.6% if computed at June 30, 2025.

Key figures at a glance

What investors will track next

The near-term question is whether deposit growth returns to the stated 20% pace without the bank having to re-raise rates. April momentum, as referenced by management, will be watched alongside subsequent quarterly disclosures for confirmation. Investors will also monitor how quickly cost of funds trends down, since term deposits typically reprice with a lag.

On the asset quality side, commentary suggests microfinance stress is easing, but the market will continue to track credit costs and delinquencies as the portfolio mix shifts. Finally, the bank’s sector-level risk actions tied to West Asia-linked volatility will be important for SME and microfinance performance, especially if higher input costs begin to squeeze borrower cash flows.

Conclusion

IDFC First Bank’s March-quarter deposit slowdown was presented as the result of a deliberate rate cut, not a deterioration in franchise strength. Management expects deposit momentum to improve, credit costs to ease as microfinance stress fades, and operating leverage to strengthen as business growth stays ahead of expenses. The bank has also outlined clear medium-term targets for deposits, loans and branch expansion through March 2029. The next set of quarterly data and management updates on deposit trends and credit costs will help validate whether the FY27 trajectory is on track.