What does credit-deposit ratio mean?

Credit-deposit ratio, popularly CD ratio, is the ratio of how much a bank lends out of the deposits it has mobilized. RBI does not stipulate a minimum or maximum level for the ratio, but a very low ratio indicates banks are not making full use of their resources. Alternatively, a high ratio indicates more reliance on deposits for lending and a likely pressure on resources.

CD ratio helps in assessing a bank's liquidity and indicates its health - if the ratio is too low, banks may not be earning as much as they could be. If the ratio is too high, it means that banks might not have enough liquidity to cover any unforseen fund requirements, may affect capital adequacy and asset-liability mis-match. A very high ratio could have implications at the systemic level.

Expressed as a percentage, CD ratio is computed as under:

Credit-Deposit Ratio = Total Advances  * 100

  Total Deposits  

As of end of FY13, CD ratio for Indian banking industry stood at 78.1%. The ratio has hardened above 75% in the past 2 years as high inflation has dented deposit activity.

As of 6^th September 2013, CD ratio was 78.52%, implying that for every Rs 100 of deposits, banks are lending as much as Rs 78.5.

If the reserve requirements such as the statutory liquidity ratio of 23% and cash reserve ratio of 4% are factored in, the CD ratio should not cross 73%. Thus, 78.52% indicates that banks are borrowing from the market to lend for projects and working capital rather than from lower-cost deposits.

With deposits growing at a lower rate of 14% vis-à-vis credit growth of 17.9%, for fortnight ended 20^th September 2013, the incremental credit deposit ratio has risen to 83%, indicating that for every new Rs 100 deposit, Rs 83 is being lent. Banks can lend out of their capital, but it is not considered prudent to do so.