The Reserve Bank of India (RBI) has expressed concerns over high credit- deposit (CD) ratios of some banks. The CD ratio of some small finance banks has gone above 100%, much higher than the industry average of 80%.
“There is no specific number for the CD ratio given to the banks by the Reserve Bank, but 70-80% is its comfortable range,” a source told FE. It is just an advisory for banks and no action has been taken against any lender, he added.
The CD ratio measures how much a bank lends out of deposits it raises. For example, a CD ratio of 75% means that three-fourths of deposits have been given out as loans.
As of September 30, 2023, Suryoday Small Finance Bank’s CD ratio was 108%, while the same for IDFC First Bank, Equitas Small Finance Bank and Utkarsh Small Finance Bank stood at 102%, 101% and 100.8%, respectively. Banks with CD ratios of less than 100% but higher than 90% include Bandhan Bank (96%) and Axis Bank (93.9%).
The average CD ratio of the banks has been hovering marginally below 80% since September 2023, according to CareEdge Ratings.
A high CD ratio may pose liquidity and credit risks 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 funds in large amounts, the bank may face liquidity challenges, making it difficult to meet short-term obligations.
With the RBI expressing concerns, the banks will move to lower their CD ratio closer to the industry average. One of the ways for banks to reduce their ratio is by growing their deposits more than their advances. This approach will not dampen the loan growth of lenders, say experts.
“Banks have already started making efforts to lower their CD ratios. They are increasing the pace of growing deposits and keeping the growth in assets under check,” said Sanjay Agarwal, senior director, Care Ratings. If the deposit growth is high, there is no need for banks to reduce the growth of advances.
Deposit growth in the banking system has been slower than the credit growth, pushing the CD ratio higher. Banks’ credit offtake increased 20% year on year to reach Rs 159.6 trillion for the fortnight ended December 29 while deposits rose at 13.2% YoY for the fortnight to reach Rs 200.8 trillion as of December 15, 2023.