RBI Raises Alarms Over Elevated CD Ratios in Banks, Urges Industry-Wide Reassessment; Industry Average at 80%

In a recent development, the Reserve Bank of India (RBI) has expressed growing concerns over the rising Credit-Deposit (CD) ratios observed in various banks. Of particular note is the revelation that the CD ratio for some small finance banks has surged beyond 100%, significantly surpassing the industry benchmark of 80%.

While the RBI has refrained from specifying a specific CD ratio threshold for banks, sources close to the matter suggest that the central bank considers the 70-80% range as comfortable. This recent observation by the RBI serves as a precautionary advisory rather than an enforcement measure, with no punitive actions taken against any financial institution at this juncture.

The CD ratio, a metric that gauges the percentage of a bank’s deposits utilized for lending, has come under heightened scrutiny. As of the quarter ending September 30, 2023, several small finance banks, including Suryoday, IDFC First, Equitas, and Utkarsh, reported CD ratios of 108%, 102%, 101%, and 100.8%, respectively. Even established banks such as Bandhan and Axis, with ratios below 100% but exceeding 90%, are being closely monitored by regulatory authorities.

A high CD ratio signifies that a substantial portion of a bank’s funds is tied up in loans, presenting liquidity and credit risks. The RBI’s expression of concern underscores the need for banks to reassess their CD ratios and work towards aligning them closer to the industry norm. Analysts suggest that achieving this objective may involve a strategic emphasis on growing deposits at a faster pace than advances, striking a balance that sustains loan growth without compromising liquidity.

Sanjay Agarwal, Senior Director at Care Ratings, notes that banks have initiated concerted efforts to bring down their CD ratios. Strategies include accelerating deposit growth while prudently managing asset expansion. This strategic recalibration becomes imperative as deposit growth in the banking system has lagged behind credit growth, resulting in an elevated CD ratio.

Recent figures highlight a 20% year-on-year increase in credit off-take, reaching Rs 159.6 trillion for the fortnight ending December 29. In contrast, deposits exhibited a slower growth rate of 13.2% year-on-year, reaching Rs 200.8 trillion as of December 15, 2023. The regulatory spotlight on CD ratios prompts banks to navigate a delicate equilibrium, fostering loan growth while maintaining robust liquidity positions.