MUMBAI: A high credit-deposit (CD) ratio by itself does not indicate a constraint on credit creation or funding vulnerability for banks, according to a report in the Reserve Bank of India’s monthly bulletin.
Deposits per se may not be a binding constraint for credit creation, the report noted.
The report has been authored by RBI staffers, and the views in the report are those of the authors and not of RBI, it was stated.
“While the CD ratio attracts considerable attention, the ratio by itself does not represent the underlying funding situation. During (a) high CD ratio phase, profitability considerations and/or prudential regulations may restrain credit creation at the margin,” the report said.
The CD ratio of scheduled commercial banks rose to 82.2 per cent in March this year from 68.6 per cent in September 2021.
The incremental CD ratio had risen to around 114 per cent in May before declining thereafter, the report said.
“The current phase of (the) rising CD ratio coincides with a growing economy along with profitable and a sound banking system,” the report said.
Credit extended by scheduled commercial banks has grown faster than deposits since 2022-23, resulting in a high ratio.
HDFC Bank’s experience following the merger with Housing Development Finance Corporation had brought this metric into focus, with the ratio rising to around 110 per cent after the merger from about 85 per cent before it.
The bank, subsequently, focused on growing deposits faster than advances and brought the ratio down to 96 per cent by March last year.
The report noted the ratio could be influenced by changes on both the asset and liability sides of banks’ balance sheets and needed to be assessed alongside liquidity and capital indicators.
A rise in the ratio does not necessarily mean that deposit mobilisation is insufficient to support credit growth, it said.
The report noted that in a modern banking system, banks did not necessarily have to mobilise deposits before creating credit. Credit creation itself results in the creation of deposits while changes in banks’ investment portfolios can also affect the CD ratio.
The recent rise in the ratio has coincided with a decline in the investment-deposit ratio, suggesting that banks have been shifting a larger share of their balance sheets to credit, it said.
A higher use of capital and borrowing as sources of funding can also push up the CD ratio without necessarily indicating a funding constraint.
The report also noted that the shift of household savings to financial-market products such as mutual funds had altered the deposit dynamics of banks. However, banks’ liquidity-coverage ratio remained well above the regulatory requirement, limiting the extent to which this shift could constrain credit creation.
The banking sector’s health has remained strong, with the gross non-performing asset ratio at 1.8 per cent, capital adequacy ratio at 17.7 per cent, and liquidity coverage ratio at 124.2 per cent in 2026, according to the report.
Foreign capital inflows, including the recent mobilisation of Foreign Currency Non-Resident (Bank), have also supported deposit growth and helped lower the incremental CD ratio from its May peak, it said.
The report concluded that the CD ratio needed to be assessed along with other balance sheet and prudential indicators, rather than viewing as a standalone measure of funding vulnerability.
Source: Business Standard
