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The credit-to-deposit (CD) ratios of major public and private sector banks experienced an uptick in the third quarter, raising concerns over potential mismatches. The public sector lenders, including State Bank of India, Punjab National Bank, Bank of Baroda, and Canara Bank, reported CD ratios lower than private counterparts such as HDFC Bank, ICICI Bank, IndusInd Bank, and Axis Bank.
As of January 2024, the industry’s CD ratio reached a three-year high, exerting pressure on net interest margins due to heightened liquidity and credit risks. Analysts anticipate a gradual reduction in CD ratios in Q2 FY25, particularly if credit demand decelerates or deposit rates rise.
What’s a CD ratio?
The CD ratio is a metric that gauges the proportion of a bank’s lending in relation to the deposits it accumulates. For instance, a CD ratio of 75% implies that three-fourths of the deposits have been disbursed as loans. As of September 30, 2023, certain small finance banks exhibited notably high CD ratios, with Suryoday Small Finance Bank at 108%, and IDFC First Bank, Equitas Small Finance Bank, and Utkarsh Small Finance Bank at 102%, 101%, and 100.8%, respectively. Other banks, such as Bandhan Bank (96%) and Axis Bank (93.9%), reported CD ratios below 100% but higher than the industry average.
The average CD ratio across banks has remained slightly below 80% since September 2023. A heightened CD ratio can pose liquidity and credit risks for a bank, indicating that a significant portion of its funds is tied up in loans, leaving fewer liquid assets. This situation may lead to liquidity challenges if depositors initiate large-scale fund withdrawals, hindering the bank’s ability to meet short-term obligations.
The likely implications
Analysts and investors fear that elevated levels of CD ratio, beyond the RBI‘s comfort range, could lead to potential challenges. There are apprehensions that this situation might force banks into margin pressure if they aggressively mobilise deposits. Alternatively, a slowdown in lending growth could be observed, or a combination of both scenarios. Such developments might result in a de-rating of the banking sector.
What can banks do?
Banks are expected to take measures to bring down their CD ratios closer to the industry average. One effective strategy is to focus on growing deposits at a faster rate than advancing loans. This approach, experts suggest, would not impede the overall loan growth of banks.
To address the current imbalance in CD ratios, banks are actively working to accelerate deposit growth while exercising caution in controlling the expansion of their assets. Despite the challenges, experts believe that if deposit growth remains robust, there may not be a need for banks to curtail their loan growth significantly.
The banking system has witnessed credit growth outpacing deposit growth, resulting in an elevated CD ratio. Credit off-take increased by 20% year-on-year to reach Rs 159.6 trillion for the fortnight ending December 29, while deposits rose by 13.2% year-on-year to reach Rs 200.8 trillion as of December 15, 2023.
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