Credit-Deposit Ratio

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.

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.

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.

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.

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

Pros	Cons
Improved Liquidity in Banking System: More deposits provide banks with greater liquidity to fund loans in the future.	Slower Credit Growth: Lower CD ratio may indicate reduced credit flow to businesses, slowing economic activity.
Stable Financial System: Reduced reliance on lending lowers the risk of non-performing assets (NPAs).	Reduced Profitability for Banks: Banks may earn less due to lower interest income from loans.
Support for Fiscal Stability: Increased deposits provide a buffer against external economic shocks.	Economic Slowdown: Lower credit uptake can lead to subdued investments and reduced consumption.
Reduced Inflationary Pressure: Lower credit growth can help control inflation by moderating money supply in the economy.	Credit Crunch in Key Sectors: Critical industries may struggle to access necessary financing for growth.
Enhanced Savings Culture: Rising deposits reflect increased public savings, contributing to long-term financial health.	Limited Private Sector Expansion: Fewer loans restrict private-sector capital expansion and job creation.

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