RBI has not mandated any number for banks' CD ratio: Gov Shaktikanta Das clears the air

The Reserve Bank of India (RBI) Governor on Thursday stated that the regulator has not prescribed any credit-deposit (CD) ratio for banks to maintain, nor does it propose to do so at the moment.

Speaking to CNBC-TV18 on the sidelines of the World Economic Forum at Davos, Governor Shaktikanta Das said that as the regulator, the RBI simply wants to ensure that there is no unnecessary exuberance in lending and that there remains some sort of correlation between the credit extended by banks and the deposits available with them.

“We have not mandated any (CD ratio) number… that this shall be the CD ratio.. and at the moment we don’t propose to, because the credit-deposit ratio is just one of the parameters to assess the health of the bank; there are several other parameters. So you have to look at it in totality,” Das said.

The comments come after there were indications over the past few weeks that the banking regulator is uneasy about the elevated credit-deposit (CD) ratio of certain banks, which could potentially pose a credit or liquidity risk.

The Governor added that the RBI was only concerned that there is no exuberance in lending and a mismatch in assets and liabilities that could lead to risk build-up.

“There should not be exuberance in lending, and there should be some correlation between deposit base and credit growth. But in terms of hard-coding it in terms of a particular number, there is no proposal in our mind, and we have not prescribed any such number.”

“Our deposit growth in the last 1-2 years has been around 12-13% and credit growth has been about 15%.. You see it is not that you get an X amount of deposit and you extend the X amount as loans. It's not like that. Money creates money; there’s a money multiplier in the market, so obviously credit will be a little higher. The question is if credit is unduly higher or if it has some correlation with the deposit base. At the systemic level and at the individual entity level, at the moment we don’t see any risk,” Das told CNBC-TV18.

Incidentally, Axis Bank chief Amitabh Chaudhry also recently told CNBC-TV18 in an interview on the sidelines of the World Economic Forum at Davos that if the RBI were to mandate a number for banks on the credit-deposit ratio, every bank would have to re-look at their balance sheets. He said that while the RBI was worried about some exuberance it was seeing on the credit growth side, especially for unsecured retail loans, he didn't think the RBI would “ever mandate a number on banks' CD ratio."

The credit-deposit ratio (CDR) is a financial metric representing the percentage of loans a bank has issued relative to its total deposits. Calculated by dividing total loans by total deposits and multiplying by 100, the CDR offers insights into a bank's lending practices and risk exposure.

To explain, consider a hypothetical entity, Happy Bank, which has total loans amounting to $80 million and total deposits of $100 million. The credit-deposit ratio (CDR) for the bank can be calculated using the formula:

CDR= (Total Loans/Total Deposits) x 100

In this example, Happy Bank's credit-deposit ratio is 80%. This means that 80% of the bank's deposits are being utilised for lending activities.

A higher CDR suggests that a significant portion of the bank's resources are allocated to loans, indicating a more aggressive lending strategy. It could potentially stimulate economic growth but also implies higher risk, as a large portion of the bank's assets are tied up in loans. Conversely, a lower CDR would indicate a more conservative approach, with a larger proportion of funds held in liquid assets or lower-risk investments. Regulators often monitor CDR to ensure banks maintain a prudent balance between lending and risk management.

Typically, in the case of Indian banks, the regulator does not prescribe a specific number to banks and leaves it to their commercial decision. However, if the CDR is excessively high for individual banks or the system and could turn into a potential risk, the RBI as the supervisor and regulator of these financial entities, could point out the risk.

Credit offtake increased by 20% year-on-year (YoY) for the fortnight ended December 29, 2023, at ₹159.6 lakh crore. These YoY figures are not directly comparable, as the data reported by the RBI as of December 29, 2023, includes the impact of the merger of HDFC with HDFC Bank. Excluding the impact of the merger, the growth stood at 15.7% YoY for the fortnight.

At the same time, deposits rose at 13.2% YoY (or 12.6% ex of the HDFC merger) for the fortnight to reach ₹200.8 lakh crore as of December 29, 2023.

At a system-wide level across all scheduled commercial banks, the latest data from RBI shows that the Credit-deposit ratio stood at 79.48% as on December 29, 2023, compared to 75.02% as on December 30, 2022, 71.93% as on December 31, 2021, and 76.47% as on December 20, 2019.

Bank deposit rates have yet to catch up with the 250 basis point rate hike undertaken by the RBI, with lending rates increasing faster than deposit rates in the cycle of monetary tightening. This has made deposits relatively unattractive, with investors diverting some of their funds towards the market instead of bank deposits to chase better returns. At the same time, credit growth has been growing in double digits.

This aggressive credit expansion, coupled with slow deposit growth, has led to CD ratios going up.