Credit-deposit ratio takes a hit in 2020


Loans disbursed by Indian banks as a percentage of deposits have constantly declined in 2020, underscoring the effects of excess liquidity and lack of credit demand.

In calendar year 2020, the credit-deposit (CD) ratio has consistently declined from 75% levels in January to 71.3% on 4 December, with the hit becoming evident in the first months of the covid-19 pandemic as credit growth slumped.

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The fall in CD ratio is a consequence of the constant inflow of deposits, which have outpaced credit growth in the last several quarters as demand dropped along with lenders’ appetite for riskier assets.

Under Reserve Bank of India rules, banks have to set aside 3% of deposits as cash reserve ratio (CRR) and another 18% in statutory liquidity ratio (SLR) compliant holdings. The rest, along with other resources, can be used for lending.

“It (falling CD ratio) is an indicator of excess liquidity because of higher deposits with the banking system and the lack of alternatives in credit markets. Also, a lot of corporates are utilizing the bond markets and that gets reflected in the investment books of banks, instead of advances,” said Sameer Narang, chief economist, Bank of Baroda.

While non-food credit grew by 5.99 trillion between 6 December 2019 and 4 December 2020, deposits expanded by 14.86 trillion in the same period. Banks have tried to dissuade savers by lowering interest rates on deposits but without success.

On the other hand, bankers said there were not many avenues for credit deployment in a year battered by covid-19 disruptions. To be sure, some amount of credit growth was ushered in by the government’s Emergency Credit Line Guarantee Scheme (ECLGS) scheme, initially for small businesses but later expanded to other stressed sectors.

A Care Ratings report said on 19 December that CD ratio has largely stood at a similar level during the last two fortnights ended 20 November and 4 December due to slower growth in credit. Besides, with deposits growing at a much faster pace than loans in the banking system, the resultant liquidity glut is working against the interests of depositors who are losing money when adjusted for inflation.

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