Incremental CD ratio moderates to 77.7%, lowest in nearly 30 months

Meanwhile, the outstanding CD ratio has moderated to 79 per cent from 80.3 per cent in March 2024

The incremental credit-deposit (CD) ratio of the banking system has moderated to 77.7 per cent — lowest in nearly 30 months — as bank credit growth slowed down to 11.5 per cent in the fortnight ended October 18 and deposit growth outpaced credit growth at 11.7 per cent, according to Motilal Oswal’s research report. In the meantime, outstanding CD ratio has moderated to 79 per cent from 80.3 per cent in March 2024.

 

“This decline may appear small; however, it needs to be seen in the context of rising CD ratio at most PSU banks, thus implying faster restoration of skewed CD ratio at private banks,” the research report said.

 

The latest data from the Reserve Bank of India (RBI) shows that after nearly 30 months, banks’ deposit growth has edged above credit expansion, potentially signalling an end to a period when the reverse was happening. Deposits in banks grew 11.74 per cent year-on-year (Y-o-Y) during the fortnight ended October 18 to Rs 218.07 trillion while credit growth during the same period came in at 11.52 per cent to Rs 172.38 trillion. 

 

“We note that the deceleration in credit growth was sharper than we thought, partly driven by the weakness in the credit environment (mainly unsecured loans), besides elevated CD ratio,” an analyst at Motilal Oswal said, adding that there is a downside risk to the FY25 credit growth estimate of 12.5 per cent and credit growth can drift down toward 10.5 per cent Y-o-Y.

 

Industry experts suggested that with HDFC Bank slowing its credit growth to bring down its elevated CD ratio, loan expansion is bound to lose pace. HDFC Bank has indicated that it will grow its loan book slower than the industry in FY25. The move comes as the lender looks to bring down its elevated CD ratio to pre-merger levels.

 

Credit growth exceeded deposit growth since the fortnight ended March 25, 2022, leading to a widening gap that reached as much as 700 basis points (bps). The challenge of deposit mobilisation for banks has been intensified by the upward trend in equity markets, which has attracted more household savings than lenders. After Covid-19, households have increasingly shifted their investment to equities, directly as well as through mutual funds (MFs), at the expense of banks. This resulted in the RBI directing banks to adopt innovative ways to attract more deposits so that the elevated CD ratio of the system comes down.

 

In the second quarter, deposit growth in private sector banks outpaced their credit growth. However, for state-owned banks (10 of the 12) that have announced their earnings, deposit growth has been slower than credit growth.