Banks' CD ratio at decadal high but deposit growth slowly outpacing credit growth, shows data

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The credit-deposit (CD) ratio of banks has been at around 80 percent, reaching a decadal high, a March 2024 report by CareEdge showed. The ratio shows how much of the money banks have raised as deposits has been lent out. A high CD ratio indicates liquidity and credit risks for banks.

“The CD ratio has been generally hovering around 80 percent since September 2023 and saw an uptick of 38 bps compared to the previous fortnight and stood at 80.3 percent for the fortnight (March 22, 2024), reaching a decade high,” said a CareEdge report.

But the January-March quarterly updates of some banks showed that deposit growth has been outpacing credit growth. RBL Bank reported deposit growth of 22 percent compared to credit growth of 19 percent on a year-on-year (YoY) basis. YES Bank reported YoY deposit growth of 22.5 percent compared to credit growth of 14.1 percent. HDFC Bank’s sequential numbers showed YoY deposit growth of 7.5 percent compared to the credit growth of 1.6 percent. Without the impact of the HDFC-HDFC Bank merger, the CD ratio for the current fortnight stood at 78 percent compared to 75.3 percent on February 24, 2023, the report said.

Robust deposit growth in Q4 of FY24

Provisional numbers in the last quarter of FY24 showed banks reporting robust deposit growth.

Last December, brokerage house Jefferies said that the uptick in bank deposit growth to 13 percent YoY, the highest in six years, has lowered the gap with credit growth. Over the past year, one of the positive trends has been the 300-basis-point (bps) improvement in deposit growth to 13 percent YoY, Jefferies said in a note. This was a result of improved GDP growth and a shift to financial savings against gold and land.

RBI concerned

In January, some media reports said that the Reserve Bank of India (RBI) expressed discomfort with the high CD ratio in the banking industry. Additionally, data and commentary from the central bank and experts show that the CD ratio of some banks has been high, leading to pressure on their net interest margin (NIM).

Aggressive credit expansion, coupled with slow deposit growth (before Q4, FY24) as investors divert their funds to the capital markets, has driven the industry towards a higher CD ratio, experts said.

"The regulator has been asking for a more reasonable CD ratio," said Sanjay Agarwal, Senior Director, CareEdge. Agarwal said that deposit growth had been slower than credit growth (before Q4 of FY25). "We've seen that the deposit growth of Indian banks has been slower than their credit growth. This has eventually led to a high CD ratio," he said.