The credit-deposit ratio of a bank is an indicator of how much a bank lends out of its deposits or how much of its core funds are used for lending. The higher it is, the better is the earning capacity of a bank and vice versa.
The credit-deposit ratio of India’s banks currently stands at a mere 71.43 percent, the lowest since March 3, 2017, when it was at 71.29 percent. The reason: banks have turned highly risk-averse amid the devastating second wave of the COVID-19 pandemic.
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For starters, the credit-deposit ratio of a bank is an indicator of how much a bank lends out of its deposits or how much of its core funds are used for lending. The higher it is, the better is the earning capacity of a bank and vice versa.
Historically, we have seen some private banks go up to 100 percent lending or even more – the banks manage their balance sheets via market borrowings. Monitoring this could give you a fair idea of the health of a bank.
The lowest credit-deposit ratio was seen during demonetisation, when it fell below 70 percent. It was the lowest at 69.29 percent for the fortnight ending December 9, 2016.
What is a credit-deposit ratio?
When you deploy your funds in a bank, via deposits, banks have to utilise these funds to earn income and to be profitable. While they borrow from you at ‘X' percent, they lend at ‘x+y’ percent to cover their other costs and also be profitable.
The credit-deposit ratio tells you how much a bank has lent against all its deposits. The higher it is (currently up to a level of around 78-80 percent range due to low SLR requirements) the better and vice versa.
Credit-deposit ratio = (Total credit divided by total deposits)*100
What is a good range?
A typical range in the Indian banking sector has been between 73-78 percent, going up to 79-80 percent at times.
The credit-deposit ratio tells you the condition of the credit demand in the country or the ability of banks to lend. Bandhan Bank and AU Small Finance Bank have a credit-deposit ratio of more than 98 percent. Bandhan Bank has it at plus 104 percent, while AU has it at 98 percent.
ICICI Bank in FY16 & part of FY17 saw more than 100 percent which has gradually reduced to around 79 percent now. Amongst the large banks, HDFC Bank has it at 85 percent.
Impact of lower ratio
The lower ratio, seen in some PSU banks to be around 50-60 percent, indicates it may not be earning as much as other banks. As of FY21, Indian Overseas Bank has the lowest C-D ratio in the banking sector at 53.15 percent. Dhanlaxmi Bank and Bank of Maharashtra have it at less than 60 percent.
(Edited by : Ajay Vaishnav)
First Published: IST