![](https://visioniasacademy.net/wp-content/uploads/2024/07/renaming-The-States-3-1-1024x1024.jpg)
The RBI is concerned about banks with high Credit-Deposit (CD) ratios, notably exceeding the industry average of 80%.
What are Credit-Deposit (CD) ratios..?
The Credit-Deposit (CD) ratio is a financial metric that shows the percentage of a bank’s total deposits that are given out as loans.
A higher CD ratio indicates that a larger portion of the bank’s deposits is being used for lending, which can impact liquidity and credit risk.
The Reserve Bank of India (RBI) has directed banks to narrow the gap between credit and deposit growth, aiming to reduce the CD ratio. According to the RBI’s Financial Stability Report, the CD ratio has risen steadily, reaching 78.8% by December 2023. Over 75% of banks with CD ratios above 75% are private sector banks.
Reasons for high CD ratios include robust credit growth, particularly in retail and MSME sectors, coupled with slower deposit growth due to competitive pressures and shifts in customer savings behaviour towards investments. High CD ratios can pressure Net Interest Margins (NIM), increase liquidity risk, and elevate credit risk for banks.