Source: BS
Context:
A research report by State Bank of India (SBI) has stated that a credit–deposit (CD) ratio beyond optimal levels sharply reduces incremental profitability and strains bank liquidity.
Key Findings:
- Optimum CD Ratio:
- Public sector & private banks: 76–80%
- Foreign banks: 65–70%
- CD ratios above 80% (PSBs & private banks) and above 70% (foreign banks):
- Diminish profitability gains
- Increase leverage-related risks
Credit–Deposit (CD) Ratio
The credit–deposit (CD) ratio is a banking indicator that shows the proportion of deposits mobilised by banks that is deployed as credit (loans).
CD Ratio=(Total Credit/Total Deposits)×100
Who uses it?
- Monitored closely by the Reserve Bank of India
- Used by banks, policymakers, and regulators to assess credit flow and liquidity conditions
Why is it important?
- Indicates credit deployment efficiency
- Reflects financial deepening of an economy or region
- Helps assess bank liquidity and stability
- Used to identify regional credit imbalances
