The credit-deposit ratio of banks: Still worth tracking?

Sophisticated banking has other funding sources that diminish the importance of this measure

- MADAN SABNAVIS

The credit-deposit ratio of banks in India is around 80% today. Should this be a concern? If the investment-deposit ratio is also considered, which is about 29%, the two together mean that for every ₹100 raised as deposits, almost ₹109 is being deployed as credit and investment.

And there is a statutory liquidity ratio (SLR) requirement of 18%, which is counted as part of the 29% invested, and a cash reserve ratio requirement of another 4%. How do these numbers add up?

From the time India went for reforms in 1991-92 to around 2003-04, the average credit-deposit ratio was around 55% and the investment-deposit ratio 33%. This came to less than 90% together, even as SLR mandates were higher. Subsequently, the average credit-deposit ratio rose to 75%, with the investment-deposit ratio remaining at around 30%. This added up to 105%.

The picture is not really odd, as this is how mature systems behave. To begin with, deposits are not the only source of funding for banks.

If the overall balance sheet of the system is looked at for 2023-24, around 77% of total liabilities are in the form of deposits and this has been the average over the years.

However, there are two other components that serve as sources of funding for credit and investment. The first are reserves and surplus, which grow with the profits that are deployed after paying dividends. This is around 8.5% of total liabilities, and growing, depending on how banks perform. As banks earn higher profits, this component goes into the capital structure of banks.