Impact of Higher Credit - Deposit Ratios

Credit-Deposit (C-D) ratio denotes proportion of deposits that are lent. C-D ratio also indicates the liquidity level of a bank to honor its withdrawal obligations and to meet its other regular funds requirements. For India, ideal C-D ratio is considered at 70%. But currently 79% should be acceptable considering Statutory Liquidity Ratio (SLR) of 18% and Cash Reserve Ratio (CRR) of 3%. However, C-D ratio touched all time high of 97% in January 2026. The credit growth rate was 14% against deposit growth rate of 11%. These two ratios together caused liquidity concerns and jitters in the inter-bank markets.

C-D ratio is a practical indicator of several things including liquidity, market interest rates, bond spreads, and probable interventions by Reserve Bank of India (RBI).  During December 2025 to January 2026 M3 (broad money and indicator of liquidity) was below Rs. 2 trillion.  The difference in spreads of AAA and AA rated 10-year bonds shrunk below 40 bips.

If C-D ratio is higher, it indicates that the bank loans are funded by non-deposit sources such as certificates of deposit, inter-bank borrowings, etc. Non-deposit sources have rigid interest cost structures and higher asset-liability mismatches. At the same time lower C-D ratios, say of 65% or below, indicates deposit-hoarding with inefficiently under-lending by the banks.  

If C-D ratios are higher than loanable ratios (i.e., 100 minus sum of SLR and CRR), bank must borrow costly inter-bank funds to meet withdrawal obligations. Also, if non performing assets increase, bank will not have sufficient funds to meet its funds requirements. Meanwhile, if RBI changes SLR or CRR, banks face funds crunch and must mobilize high cost deposits at the cost of profitability.

In the past 50 plus years, C-D ratios in India increased with a mix of negative and positive impacts. During 1970s to 1980 the average C-D ratio has been low between 60% to 65%. This is due to SLR at 35% and average CRR at 5%. During 1980 to 1990 the C-D ratio has been 60% despite SLR at 36% and average CRR at 10%. During 1990s to 2000s, the C-D ratio fluctuated being 52% in year 1994 after crossing 70% during 1991-92 economic crisis. During this period, SLR and CRR put together were at their highs of 50% implying loanable funds from deposits are hardly 50% of net demand and time liabilities (NDTL).

From 2000 to 2015 the C-D ratio increased to touch 70 to 75% range with SLR and CRR together hovering at 30%. From 2016 to 2025 the C-D ratio remained above 75% and peaked to 97% in January 2026. Every situation warranted RBI’s intervention, and impacts included higher inflation, sectoral lending, lower net interest margins (NIMs) for banks, lower bond yields, surge in stock market prices, and currency depreciation.  

Some bank mergers were mainly due to high C-D ratios. Nedungadi Bank was merged into Punjab National Bank when former’s C-D ratio touched 110%. Similarly, mergers of Bank of Punjab into Oriental Bank of Commerce, and Centurion Bank of Punjab into HDFC Bank, etc., were due to higher C-D ratios draining liquidity of the impacted banks. Post merger, the C-D ratio of HDFC bank touched 110% and RBI advised the Bank to bring down C-D ratio to below 80% by year 2027.

If C-D ratio is higher, say above 65%, unless incremental deposits are higher, banks cannot meet industry’s credit requirements. This may in turn cause higher inflation. If the higher C-D ratio is due to higher loan volumes to unproductive sectors or untimely loans to specific sectors, then also the negative impact will be sticky to be undone. To address such situations RBI may instantly conduct open market operations (OMO) but this will not be without loss for the system. It is a challenging task for RBI to manage heavy liquidity shortages without compromising on inflation and currency depreciation as are evident in the current market situations. Orderly credit dispensation by banks, maintaining ideal C-D ratios, and diversifying deposit sources are the responsibility of the banks to benefit themselves and the system.

Kishore Nuthalapati 

The author is CFO of BEKEM Infra Projects Pvt Ltd