Rethink needed on widening credit-deposit growth gap: Das 

Banks’ boards must re-strategise their business plans to address the concerns around credit growth persistently outpacing deposit growth, Reserve Bank of India (RBI) governor Shaktikanta Das said on Friday.

“The persisting gap between credit and deposit growth rates warrants a rethink by the boards of banks to re-strategise their business plans. A prudent balance between assets and liabilities has to be maintained,” he said.

According to RBI data, banks’ credit-deposit (CD) ratio rose from 72.36% in Q1FY22 to 81.51% in Q4FY24. While public sector banks’ CD ratio rose from 67.74% in Q1FY22 to 75.78% in Q4FY24, private banks’ CD ratio grew from 81.92% to 91.30% during the same period.

While the RBI does not prescribe a certain level of CD ratio for banks, deputy RBI governor Swaminathan J said the regulator will assess the macro level impact of building up of risks. “The risks, that can probably arise in case this gap (between credit and deposit growth) widens further, is that there could be a liquidity risk, or rollover or repricing risk as far as deposits are concerned.”

According to Sanjay Agarwal, senior director at CareEdge Ratings, banks must maintain a reasonable CD ratio of 80% or below. During the last two years, credit growth has far outpaced deposit growth, he says, which has led to heightened CD ratio. The RBI, accordingly, is indirectly cautioning the players that there has to be a fair mix of liabilities to fund asset growth.

Agarwal expects that due to a high base, banks’ credit will likely grow at 14% y-o-y in FY25 as against 16% in FY24, excluding the HDFC twins merger. Deposit growth, meanwhile, will likely sustain at 12-13% range in FY25 too.

“Currently the demand for credit is pretty high from services and retail sectors, whereas deposit growth is lower. So it will take some time for deposit growth to catchup with credit growth. Accordingly, CD ratio is likely to inch up moderately,” he said.

A private bank MD said that the repeated cautioning by the RBI could be to prompt some private lenders to lower their CD ratio to a sustainable level. As on March 2024, largest private sector lender HDFC Bank’s CD ratio stood at 105.4%, while that of Axis Bank was at at 90.3%. IDFC First Bank and Bandhan Bank’s CD ratio was also higher, at 100.29% and 92.2% as on March 2024, respectively.

“Sustained high CD ratio suggests mismatches in the asset liability management, which could be bank specific or systematic problem,” said Soumyajit Niyogi, director at India Ratings & Research.

“Currently by and large it’s systematic problem. Higher CD ratio is being managed by temporary solution, thus it raises money multiplier. Again sustained high money multiplier amid high demand for credit doesn’t auger well for the stability in the financial market,” he added.