SFBs knock RBI door as credit-deposit ratio go over 90%

With the credit-deposit ratio going past the 90 per cent mark, small finance banks have sought a relaxation of the existing computational norms set by the Reserve Bank of India.

Unlike large universal commercial banks who have CD ratio in the range of 80-90 per cent, multiple SFBs have higher CD ratio of over 90 per cent, with Suryoday SFB’s CD ratio at 110 per cent as on Q1FY25, and Jana SFB’s CD ratio standing at 102 per cent. 

• Also read: Private sector, small finance banks record over 20 per cent growth in deposits in FY24

Key parameter

CD ratio or the loan-to-deposit ratio is used to assess a bank’s liquidity by comparing its total loans to total deposit for the same period. If the ratio is too high, the lender does not have enough liquidity for unanticipated stress or sudden withdrawals of funds.

The current methodology of calculating the CD ratio does not consider the borrowings that SFB avails from refinance institutions like Nabard, SIDBI, and NHB, said a senior SFB official. “The liquidity generated by availing re-finance also is used for asset sourcing. Hence, if the re-finance portion is considered while computing the CD ratio to maximum extent of 20 per cent of credit, then the credit-deposit ratio will improve for SFBs,” the official said.

“SFBs have portfolios which are approved by these three specific institutions. Availing refinance as well as maintaining low CD ratio becomes a drag on the P&L. Give these institutions are trustworthy of being stable and long-term partners, their refinance should be considered in the same vein as deposits raised by bank,” said a senior banker. RBI did not respond to businessline queries till press time.

Managing asset liability

SFB officials say re-finance helps them in managing asset liability better, as these are long-term funds and their tenor are similar to asset on books, with lower interest rates and no cash reserve ratio and statutory liquidity ratio requirement. Similar tenor of 5-10 years is unavailable in the deposit market.

In a post-Monetary Policy Committee press conference in June, when asked whether the RBI will take any action against higher CD ratio of lenders, Deputy Governor Swaminathan J said the regulator flags any potential build-up of risk to lenders.

“As mentioned in the Governor’s speech, we have requested the boards to re-look and re-strategise their business plans, taking into account, the widening gap between the growth in deposits and growth in their loan book. So, it is left to the individual entities, basis their business plans,” he said.