Incremental CD ratio stood at 90.8% as on May 31: RBI Bulletin

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 margins (NIM)

The incremental credit-deposit (CD) ratio of scheduled commercial banks stood at 90.8 percent as on May 31, 2024, the Reserve Bank of India (RBI) said in its bulletin. The central bank in the past few months has been highlighting the high CD ratio of some banks.

The CD ratio refers to the credit-deposit ratio in the banking industry. In other words, it tells us how much of the money banks have raised in deposits has been deployed as loans. A high CD ratio indicates liquidity and credit risks for banks.

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 margins (NIM). This is largely due to credit growth far outpacing deposit growth in the banking system, they said.

The RBI Bulletin is a monthly publication that offers insights into the developments in domestic and global economies but doesn’t represent the views of the central bank.

Credit deposit growth

The RBI in the bulletin highlighted that credit growth of these banks stood at 16.1 percent for the same period, compared to 15.4 percent last year.

Whereas deposit growth of these banks remained in double digits, the bulletin said. “SCBs’ deposit growth (excluding the impact of the merger), which recorded an increase in the wake of withdrawal of Rs 2000 banknotes, remained in double digits in May 2024,” RBI said.

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

Sanjay Agarwal, Senior Director, CareEdge said: "The regulator has been asking for a more reasonable CD ratio number." Agarwal said that deposit growth has been slower than credit growth. "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. Additionally, many private sector banks are witnessing faster credit growth than deposit growth which needs to be balanced out, he added