Credit-Deposit Ratio of Indian Banks at 20 years Record High!

As per the RBI 2023-24 financial report, the Credit-Deposit Ratio of Indian Banks is 80% which is a record high in the last 20 years since CD Ratio came into effect in 2005. Thus, banks are struggling to get enough deposits to accompany the rise in credit.

The Credit-Deposit Ratio shows how much loans are disbursed from the available deposits by Indian Banks. Since the CD ratio currently is 80% means that out of ₹100 (deposit available in bank), ₹80 is being given as loan by bank to the customer. Thus, only ₹20 remains as a deposit with the bank. Now if another customer comes for credit then banks have to shell out their own money (liquidity, net interest margin (NIM), and credit risks) because customer deposits are less.

Indian investors are focusing more on mutual funds, gold, and the equity market for higher returns which is one of the reasons why bank deposits have reduced. On the other hand, consumption via home loans, personal loans, buy now & pay later, credit cards, etc. have increased.

Banks hiked deposit interest rates in 2023-24, but with 80% credit-deposit ratio, impact seems missing. Also, with NBFCs (non-banking financial institutions) providing attractive deposit interest rates, can be another reason for this situation.

Report shows that in FY 2023-24 (as on 22 March), deposits grew 13.5% to ₹204.8 trillion while non-food credit grew 20.2% to ₹164.1 trillion. Besides, in FY 2022-23, deposits grew 9.6% and credit by 15.4%.

However, there is some good news as well for banks. The January-March 2024 quarterly report showed that deposits are gaining more traction than credits in some banks, thanks to higher interest rates. On a YoY basis, RBL Bank grew 22% in deposits compared to 19% in credit. Yes Bank grew 22.5% and 14.1% respectively while HDFC Bank grew 7.5% in deposits and 1.6% in credit giving.

Uday Kotak (Founder & Director of Kotak Mahindra Bank) said:-

India is transitioning from a nation of savers to investors, posing a long-term challenge for the banking sector, which relies on Current Account and Savings Account deposits as its primary funding resource.

To address this issue of high credit-deposit ratio, RBI recently increased the risk weightage for unsecured loans by asking higher capital allocation from both banks and NBFCs. The idea is to slow consumer lending and reduce yields as unsecured loans typically offer higher returns than mortgages. Besides, Banks are also scaling up under-penetrated businesses that offer potential for growth, such as business loans, MSME loans, consumer durables loans, and microloans.

In a recent meeting with banks, RBI Governor Shaktikanta Das emphasized the importance of sustained vigilance. He highlighted several critical areas, including the viability of business models, the concerning trend of excessive growth in personal loans, adherence to co-lending guidelines, and banks exposure to NBFCs.