Reserve Bank of India raised concerns over bank’s high CD Ratio and asked them to bridge the gap between credit and deposit growth and reduce CD ratio.
- CD Ratio is a financial metric representing the percentage of loans a bank has issued relative to its total deposits.
Key Reasons for high CD ratio
- Higher credit growth
- Rising retail credit (includes vehicle loans, personal loans, etc.).
- Increasing loans to businesses and MSMEs.
- Slower deposit growth:
- Banks are facing stiff competition with each other.
- Additionally, customers are transitioning from savers to investors and diverting funds to capital markets, slowing deposit growth.
Impact of High CD Ratio Bank may face:
- Pressure on Net Interest Margins (NIM): NIM is a measure of the net return on the bank’s earning assets like investment securities, loans, etc.
- Liquidity risk: Banks’ may be unable to timely meet payment obligations.
- Credit risk: Borrowers could default on their contractual obligations