The Reserve Bank of India (RBI) has voiced apprehensions regarding the soaring Credit-Deposit (CD) ratios observed in certain banks, particularly expressing concern over some Small Finance Banks surpassing the industry average of 80%. While the RBI has not specified a prescribed CD ratio, sources suggest that the central bank’s comfort zone typically ranges from 70% to 80%.
As of September 30, 2023, Suryoday Small Finance Bank has recorded a CD ratio of 108%, with IDFC First Bank, Equitas Small Finance Bank, and Utkarsh Small Finance Bank standing at 102%, 101%, and 100.8%, respectively. Even banks with CD ratios below 100%, such as Bandhan Bank (96%) and Axis Bank (93.9%), are under scrutiny.
A high CD ratio indicates that a significant portion of a bank’s funds is tied up in loans, potentially posing liquidity and credit risks. The fear is that if depositors make substantial withdrawals, banks might face liquidity challenges, hindering their ability to meet short-term obligations.
‘Banks have already started making efforts to lower their CD ratios. They are increasing the pace of growing deposits and keeping the growth in assets under check,’ stated Sanjay Agarwal, Senior Director at Care Ratings. The approach involves accelerating deposit growth to mitigate the need for banks to curtail advances.
The slow growth in deposits relative to credit has contributed to the elevated CD ratios. Credit off-take in the banking system surged by 20% year-on-year, reaching Rs 159.6 trillion for the fortnight ended December 29. Meanwhile, deposits saw a more modest increase of 13.2% year-on-year, reaching Rs 200.8 trillion as of December 15, 2023.
