Why the credit-deposit ratio needs a rethink

Vasant G Hegde and Lalan Mishra

Banks, as financial intermediaries, accept deposits and lend money to MSMEs, corporates and households, keeping the wheels of the economy turning. Every rupee deposited in a bank should work for the economy—but are banks using these funds as efficiently as the numbers suggest?

The Reserve Bank of India has repeatedly flagged concerns about the high credit-deposit (CD) ratio and the widening gap between credit and deposit growth in the banking sector. These concerns are particularly acute for private sector banks, which are markedly aggressive in lending because shareholders favour banks with healthy bottom lines and higher net interest margins (NIM).

For starters, the credit-deposit ratio, also referred to as the loan-to-deposit ratio, is a fundamental financial metric that indicates the proportion of a bank’s deposits deployed as loans and advances. Expressed as a percentage, it reflects a bank's liquidity position. So, if a bank has total deposits of Rs 100 crore and loans of Rs 70 crore, its CD ratio is 70%.

Under the fractional reserve system, banks must comply with the central bank’s requirements and set aside 3.25% as the cash reserve ratio and 18% as the statutory liquidity ratio of their total deposits. Banks also maintain additional liquidity buffers for customer withdrawals and investments. Going by the textbook definition, the ideal CD ratio should lie between 70% and 75%. Anything less means a bank is not lending enough and is keeping the funds idle; a higher ratio indicates aggressive lending and heightened liquidity risks.

As of the end of August 2025, total deposits held by banks stood at Rs 237 lakh crore against total loans of Rs 186 lakh crore. The CD ratio for the banking sector is thus around 79%, driven largely by healthy retail credit demand and increased lending to businesses and MSMEs, coupled with relatively slower deposit growth.

Based on figures from select balance sheets, top private sector banks such as HDFC Bank, ICICI Bank and Axis Bank recorded CD ratios of 99%, 87% and 92%, respectively. In comparison, the public sector banks, such as State Bank of India, Canara Bank and Punjab National Bank, reported CD ratios of 78%, 72% and 69%. Loans are the primary source of interest income for banks. A higher CD ratio for private sector banks results in higher interest income, boosting NIMs and overall profitability. Private banks also earn significant fee-based income by distributing mutual fund units and insurance products and offering demat services. These numbers, however, depend on the data published on bank websites. What explains these variations? How can a bank lend more than the ideal ratio of 75%?

The answer lies in differing interpretations of the ratio. Many banks borrow funds from the RBI and use them for lending. Many others borrow by issuing certificates of deposit (CDs), which are short-term money market instruments. The amount raised through this route is insignificant and may not impact the CD ratio much. A few others, who have sufficient shareholder funds, use their capital to supplement deposits to lend. This ambiguity points directly to a lack of clear and uniform reporting standards by banks. This inconsistency in reporting may mislead policymakers, depositors, shareholders and employees. For the sake of clarity, banks should declare clearly -- either in their annual reports or in investor presentations -- the loans given through deposits, loans given through borrowed funds and loans given out of shareholder funds.

What is the solution to a high CD ratio? Banks must either reduce lending (the numerator) or increase deposits (the denominator). But deposit mobilisation is increasingly difficult due to competition from riskier assets such as equity shares, mutual funds or bitcoins. In response to the RBI’s concerns about high CD ratios and the resultant liquidity risks, many private sector banks have slowed down their lending. A few others have been selling their loans to asset reconstruction companies. Some have explored alternative funding avenues such as infrastructure bonds, which are exempt from certain reserve requirements.

If banks are using funds other than deposits for lending, then calling the metric the CD ratio is a misnomer. It should be more accurately termed as credit-to-funds ratio (CF ratio)—with funds comprising deposits, borrowings and capital. It is high time the RBI addressed this ambiguity for the benefit of all stakeholders.

(The writers are ex-bankers and currently train bankers at Manipal Academy of Higher Education, Bengaluru)  

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.