Karnataka loan-to-deposit ratio down, but stable: RBI study

Loans disbursed by banks in Karnataka as a percentage of their deposits saw the “largest decline” among nine states during the pandemic, according to a Reserve Bank of India study that was commissioned by the B S Yediyurappa-led administration.

This means banks are lending less, which is bad news for the government that is pushing them to give more credit, especially in the agriculture and housing sectors.

The study found Karnataka to have suffered a decline in credit-deposit ratio of 5.13 percentage points in 2020-21 fiscal compared with 2019-20, the highest decline among Kerala, Tamil Nadu, Andhra Pradesh, Telangana, Madhya Pradesh, Rajasthan, Gujarat and Maharashtra.

The CD ratio shows how much a bank lends out of its deposits or how much of its core funds are used for lending. A falling CD ratio can indicate excess liquidity because of higher deposits and a lack of demand for credit or loans.

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The state government is worried because Karnataka’s CD ratio has gone from 77.08% in June 2019 to 71.92% in September 2020. It was this trend that drove the government to get RBI’s Financial Inclusion and Development Department to take up a study on Karnataka’s CD ratio.

Variation in Bengaluru Urban, which accounts for three-fifths of Karnataka’s banking business, had an impact on the CD ratio. The CD ratio in the capital district went from 79.69% in June 2019 to 71.66% in September 2020.

“One of the main reasons behind low CD ratio of Bengaluru Urban, as confirmed by major banks, is equity-funded IT/IT-enabled services sector reducing dependence on bank credit as also large inflows in the form of foreign investments, which reflect in the large deposit base in the district,” the study said.

“Also, high percentage of bulk deposits from government departments in Bengaluru Urban, high percentage of HNI customers and pensioners are also contributing to disproportionately high deposit base in the state.”

Lower levels of CD ratio for longer periods could indicate “commercial considerations as rising NPAs lead to tightening of lending standards. It could also point to increasing dependence on the informal/non-bank sector for sourcing funds,” the study said.

There is some consolation, though. The CD ratio during the past 10 financial years was the most stable in Karnataka.