Incremental Credit-Deposit ratio of Scheduled Banks’ declined in the financial year so far

The incremental credit-deposit (C-D) ratio of scheduled banks’ declined in the financial year so far, as incremental deposit accumulation has been almost two times the credit disbursement.

The incremental C-D ratio since March-end till June 2, 2023, declined to 50.24 per cent against 95.17 per cent in the year-ago period (March-end to June 3, 2022).

The C-D ratio conveys how much of each rupee of deposit is going towards credit markets. A higher growth in this ratio suggests credit growth is rising quickly, which could lead to excessive risks and leveraging on the borrower’s side.

“In the case of banks, it could imply that there will be a rise in non-performing assets when the economic cycle reverses. This ratio serves as a useful measure to understand the systemic risks in the economy,” according to the RBI.

Deposit accumulation

Deposit accumulation of scheduled banks at ₹6,65,238 crore in the financial year so far was almost 2.5 times the year ago period’s accumulation (of ₹2,63,819 crore)

The robust deposit accumulation comes against the backdrop of higher interest rates being offered by banks on term (time) deposits and ₹2,000 bank notes being returned to banks by the public as RBI is withdrawing them from circulation in view of these notes not being commonly used for transactions and in pursuance of its “Clean Note Policy.”

Credit disbursement

Credit disbursement by scheduled banks at ₹3,34,272 crore in the financial year so far was about 1.33 times the year-ago period’s disbursement (of ₹2,51,099 crore).

Banks seem to be witnessing relatively healthy credit growth in sectors such as services, personal loans, agriculture and allied activities, and large industry, going by the RBI’s sectoral deployment of bank credit data for April 2023.

In a recent NABARD Research and Policy paper, Dennis Rajakumar, Director, EPW Research Foundation, said: “The credit (lending) to deposit ratio reveals the role of banks in ‘promoting productive sectors and contributing to economic growth’ (RBI, Report on Trends and Progress of Banking in India 2003-04: 63), and so a higher CD ratio implies greater credit orientation of banks.

“The CD ratio informs the extent of banks credit in relation to deposits. The CD ratio could vary depending upon monetary policies. If the CD ratio remains unchanged, it means the credit expansion has kept pace with deposit mobilisation.”

CARE Ratings, in a note, observed that credit demand was lower at the beginning of the fiscal year, hence pressure on deposit rates has eased. The rise in rates seems to have been arrested for now, at the end of May.

“The trajectory of rates on the deposit side will be shaped by the pace of credit offtake; hence, we would need to observe the rate movement over the coming months to conclude if the rates have peaked or if further increases will continue,” per the note.