As deposits flag, bank CD ratio at highest since ’70s

Despite high lending rates translating into extremely attractive deposit rates, banks haven’t grown their deposits portfolio apace with loans.

As a result, the incremental CD ratio (6 month rate of change) rose to 138% in March from 76% in December, the highest in more than 40 years.

Credit-deposit (CD) ratio is the amount of loans given out by banks to the total deposits they have. Incremental refers to the additional credit lent and deposits gathered in a particular period.
Overall, the banking system’s CD ratio stood at 78.1% in March.

The Reserve Bank of India recommends a CD ratio of 60%
A high CD ratio means banks are not garnering enough resources to continue lending at the pace they are.

“It is also a structural drain on liquidity because of the growing gap between deposit (inflows) and credit (outflows) growth,” said Sonal Varma and Aman Mohunta of Nomura in a report on Monday.

Deposit growth fell to 13.4% in March, compared with 17% in December last year.

“Deposit growth has moderated despite high deposit rates due to slow reserve money creation and the lagged impact of the past slowdown in credit growth and high inflation,” Varma and Mohunta said.

The reason credit exceeded the deposits, experts suggest, is that banks had resorted to other modes of fund raising than sticking to deposits.

During March, banks typically grow their balance sheet by borrowing wholesale funds like by way of bulk deposits, certificate of deposits and corporate bonds, experts said.

But this may become a cause for concern, as a high CD ratio would translate into a weak transmission of the RBI’s monetary policies, Varma and Mohunta said.

The central bank’s desperate attempts at containing inflation within comfortable level by means of increasing rates would become unsuccessful.

The RBI, thus wants banks to depend on deposit taking as it is a far more stable funding method, says A Prasanna, chief economist, ICICI Securities Primary Dealership.

However, Samiran Chakraborty, chief economist from Standard Chartered sounds less cautious. “This is generally an abnormality in March and before drawing any conclusions we need to see how April pans out,” he said.

Bankers too, would not like to get their antennas out yet. “

Wholesale funds are legal windows which the regulator has given to the banks and there is nothing wrong in tapping these. When the cost of deposits exceeds a certain limit, lenders have to look out for alternative sources of funding,” said a senior official at a leading public sector bank.

Rajat Monga, group president- financial markets and chief financial officer, Yes Bank believes things will turn around sooner. “With government spending coming into the system deposit growth will improve as a result the CD ratio will come down.”