Commercial Banks' Credit-Deposit Ratio

The credit-deposit (CD) ratio of commercial banks has surpassed the 80% mark, which is considered the upper limit of the regulatory comfort zone. This marks a significant point as it indicates challenges in resource mobilization for lenders amid increasing loan demand.

Credit-deposit (CD) ratio

The credit-deposit (CD) ratio is a bank metric that shows how much of a bank's total deposits are lent out as loans. It is calculated as the total credit (or advances) divided by the total deposits, expressed as a percentage. A high CD ratio indicates aggressive lending, while a low one suggests cautious lending

Recent Data and Trends

• The CD ratio was recorded at 80.21% for the fortnight ending October 31, as per RBI data.
• Previously in September, the ratio had exceeded 80% before a slight dip, only to rise again in October.

Factors Influencing the CD Ratio

• Deposit and Credit Growth:
  • Deposit growth has been sluggish, at 9.7% year-on-year in October, down from 10.3% in March.
  • Credit growth improved to 11.3% from 11% over the same period.
• Interest Rate Dynamics:
  • The repo rate was cut by 100 basis points between February and June.
  • Banks like ICICI have increased deposit rates to encourage deposit mobilization.

Loan Demand and Economic Factors

• Loan demand typically rises in the second half of the fiscal year.
• Factors such as low interest rates, GST rate rationalization, and income tax benefits are contributing to expected credit growth.

Challenges and Projections

• Corporate Investment Demand:
  • Expected to rise as consumption and capacity utilization improve.
  • Large corporate borrowing continues to pressure the CD ratio.
• Interest Rates and Small Savings:
  • Further rate cuts expected in the next RBI policy review may challenge deposit mobilization.
  • Rates on small savings schemes remain unchanged and above formula-based rates.

Liquidity and Market Conditions

• Certificates of deposit remain low, at around 2% of total deposits.
• Banking system liquidity is in surplus but showing signs of decline.