Context:
HDFC Bank repurchased nearly ₹7,000 crore worth of its high-cost bonds in the last six months. Move aimed at lowering its credit-deposit (CD) ratio, which surged to 110% post-merger with Housing Development Finance Corp (HDFC) in July 2023. Bond buyback represents a small fraction of HDFC Bank’s ₹4 lakh crore outstanding borrowings (March 2024).
The Credit-Deposit (CD) Ratio
The Credit-Deposit (CD) ratio measures the proportion of a bank’s total deposits that have been disbursed as loans, reflecting how efficiently a bank uses its deposits to generate income and indicating its liquidity and credit risk.
The credit-deposit ratio (CD ratio) is a measure of how much a bank lends out of its total deposits. It’s calculated by dividing the total loans by the total deposits and multiplying by 100.
What does the CD ratio indicate?
- High CD ratioIndicates that the bank is lending out a large portion of its deposits, which could be due to high demand for loans
- Low CD ratioIndicates that the bank is lending out a smaller portion of its deposits, which could be due to low demand for loans
How does the CD ratio affect the bank?
- A high CD ratio could indicate that the bank may not be able to mobilize enough deposits to meet the demand for credit
- A low CD ratio could indicate that the bank has conservative lending practices
How does the Reserve Bank of India (RBI) encourage banks?
- The RBI has encouraged banks to adopt innovative strategies to get more funds and narrow the gap between credit and deposit growth
What is an ideal CD ratio?
Some experts say that an ideal CD ratio would be between 65% and 75%
- Definition:The CD ratio is calculated by dividing the total loans outstanding by the total deposits, expressed as a percentage.
- Significance:
- Bank Health: It’s a crucial indicator of a bank’s liquidity and ability to cover loan losses and withdrawals.
- Liquidity & Risk: A high CD ratio might mean a bank is lending a significant portion of its deposits, potentially increasing liquidity and credit risks.
- Profitability: A low CD ratio may suggest the bank is not fully utilizing its resources, potentially impacting profitability.
- Factors Influencing the Ratio:
- Credit Demand: Strong demand for loans can raise the CD ratio.
- Deposit Mobilization: Higher deposit growth can lower the CD ratio, especially if lending doesn’t keep pace.
- Economic Conditions: Booms or recessions can affect both loan demand and deposit growth, influencing the CD ratio.
- Example: A bank with a CD ratio of 75% means that three-fourths of its deposits have been used for lending.
