Banks in India added more deposits than loans last year, leading to a softening of the credit-deposit ratio. 

Key Highlights on Credit Deposit Ratio

• Softening of the credit-deposit ratio in 2024  to 89.5%, compared to 94% in 2023.
• Despite deposit growth lagging behind advances, the gap between fresh deposits and non-food credit widened to ₹2 trillion in 2024, up from ₹1.3 trillion in 2023.

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About Credit-Deposit Ratio

• Definition: A financial metric used to assess a bank’s liquidity by comparing its total loans to total deposits for the same period.
• Representation: Indicates the percentage of deposits utilized for issuing loans.
• Calculation: Total loans issued by the bank divided by its total deposits.
• Guidelines: No specific benchmark set by the Reserve Bank of India (RBI); banks manage the ratio based on liquidity and profitability considerations.

Factors Influencing Credit-Deposit Ratio (CD ratio)

• Increased Loan Demand: Higher demand for loans can raise the CD ratio.
• Deposit Mobilization: Increased deposits can lower the CD ratio if lending does not increase proportionately.
• Economic Conditions: Booms or recessions impact both loan demand and deposit growth, influencing the CD ratio.

Implications of High Credit-Deposit Ratio on Banks

• Profitability: Indicates active lending, which may enhance profitability if loans are serviced on time.
• Risk Exposure: Higher credit exposure could lead to non-performing assets (NPA) if repayments are not met.
• Pressure on Net Interest Margins (NIM): Increased reliance on lending may narrow NIM, affecting returns on earning assets like loans and investments.
• Liquidity Risks: Banks may face challenges in meeting sudden payment obligations or withdrawals due to low liquidity reserves.

Implications of Low Credit-Deposit Ratio on Banks

• Profitability Impact: Reflects insufficient lending, potentially affecting the bank’s revenue streams.
• Cautious Lending: May indicate economic uncertainty or lack of suitable lending opportunities.

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Implications of Softening Credit-Deposit Ratio on Economy

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