Context:
Reserve Bank of India has told banks to bridge the gap between credit and deposit growth and reduce CD ratio.
Credit-Deposit (CD) Ratio:
- A financial metric representing the percentage of loans a bank has issued relative to its total deposits.
- RBI does not prescribe any ratio.
- An optimal CD ratio typically ranges between 80-90%.
- Impacts –
- High CD Ratio: This means that a bank is lending a large portion of the money it has received as deposits. However, if not managed properly, it can lead to liquidity problems.
- Low CD Ratio: In contrast, a low CD (Credit-Deposit) ratio indicates that the bank is not lending enough, which could affect its profitability.
- Factors influencing CD Ratio –
- Increase in demand for loans can raise the CD ratio.
- Higher deposit mobilization can lower the CD ratio if lending does not increase proportionately.
- Economic booms or recessions can impact both loan demand and deposit growth.
RBI’s Financial Stability Report – Key Points:
- CD ratio has been rising since September 2021 and peaked at 78.8% in December 2023.
- Over 75% of the banks with C-D ratios above 75% are private sector banks.
Key Reasons for high CD ratio:
- Higher credit growth –
- Rising retail credit (includes vehicle loans, personal loans, etc.). From April 2022 and March 2024, bank lending to the retail sector grew at a CAGR of 25.2%.
- Increasing loans to businesses and MSMEs.
- Slower deposit growth –
- Banks are facing stiff competition with each other.
- Additionally, customers are transitioning from savers to investors and diverting funds to capital markets, slowing deposit growth.
Impact of High CD Ratio:
- Bank may face: Pressure on Net Interest Margins (NIM), a measure of the net return on the bank’s earning assets like investment securities, loans, etc.
- Liquidity risk: Banks’ may be unable to timely meet payment obligations.
- Credit risk: Borrowers could default on their contractual obligations
Source: Economic Times
Previous Year Question
Consider the following statements:
Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
Which one of the following is correct in respect of the above statements?
[UPSC Civil Services Exam – 2023 Prelims]
(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-1
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-1
(c) Statement-I is correct but Statement-II is incorrect
(d) Statement-I is incorrect but Statement-II is correct
Answer: (a)
