Banks are looking to bring down their elevated credit-deposit (CD) ratio in the coming quarters. The CD ratio of several banks, including HDFC Bank, IDFC First Bank and some small finance banks, has gone above 100%, which is higher than the industry average of 80%.
HDFC Bank expects its CD ratio, which is currently at 110%, to ‘go down progressively over several quarters to come’ while IDFC First Bank, with a 101% CD ratio, plans to bring it down to below 100%. Utkarsh Small Finance Bank aims to lower its CD ratio from 99% currently to around 93% by March next year.
CD ratio, also referred to as loan-to-deposit ratio (LDR), indicates how much of the money that banks have raised in the form of deposits has been deployed as loans. In case of HDFC Bank, the high LDR is due to its merger with mortgage lender HDFC, said the management.
“If you strip the merger effect, it’s (LDR) about 89%. So essentially, the LDR is a function of what has happened on the merger,” said Srinivasan Vaidyanathan, CFO, HDFC Bank, in an earnings call. “It’s about two quarters’ run on the merger. We have run through two quarters and we do have a kind of a path where we do want to replace borrowings with deposits and grow further loans with the deposits. So, you should expect the LDR to go down progressively over several quarters to come,” he added.
Prior to the merger, its CD ratio was at 85% and lender had maintained the ratio at 85-87% over a long period. The RBI has not prescribed any specific number for the CD ratio but governor Shaktikanta Das has cautioned banks against exuberance in lending.
The average CD ratio of the banks has generally been hovering marginally below 80% since September 2023, according to CareEdge Ratings.“We have been bringing down the CD ratio because deposits have been growing faster. We had legacy problems that’s why our CD ratio was 137% at merger.
If you see even this year so far, we have brought it down from 109% to 101%. And maybe by the year-end, we will be lower than 100%,” said Sudhanshu Jain, CFO and head corporate centre, IDFC First Bank, in an earnings call.
A high CD ratio may pose liquidity and credit risk for a lender. When the CD ratio is high, it implies that a large portion of the bank’s funds is tied up in loans, leaving fewer liquid assets. If depositors suddenly withdraw their funds in large amounts, the bank may face liquidity challenges, making it difficult to meet its short-term obligations.
“The CD ratio for this year-end will be in the range of 97% and next year we expect 4-5% fall by March 2025. So, by March 2025, we may be closer to 92-93%,” Govind Singh, MD & CEO, Utkarsh Small Finance Bank, said in an earnings call. Other small finance banks which have CD ratio of over 100% include Suryoday Small Finance Bank and Equitas Small Finance Bank.