RBI Governor Shaktikanta Das, in his statement following the recent Monetary Policy Committee (MPC) meeting, voiced his concerns about the challenges faced by banks to mobilise deposits. He observed that retail customers are turning to alternative investment avenues that are relatively more attractive than bank deposits and that this is causing deposit growth rates to trail loan growth rates. He called for banks to focus more on mobilisation of household financial savings through innovative products by leveraging their vast branch networks.

This comes on the back of deposit growth (on a YoY basis) of all the Scheduled Commercial Banks (SCBs) put together coming in at rates significantly lower than that of rates of credit growth for the past two FYs. And it showed in the CD ratio (Credit as percentage of Deposits) steadily rising to cross 80 per cent as of FY24 end.

The implications

CD ratio is not a statutory ratio to be maintained at prescribed levels by banks. The ideal CD ratio can vary from case to case. But in general, banks can be better off maintaining a CD ratio between 70 and 80 per cent levels, after accounting for CRR (Cash Reserve Ratio) at 4.5 per cent, SLR (Statutory Liquidity Ratio) at 18 per cent and for LCR (Liquidity Coverage Ratio) requirements.

With respect to individual banks, those with CD ratios at elevated levels will face twin challenges. For one, their credit growth will be curtailed, unless they are able to mobilise deposits. It can be understood from the conference calls of banks that there is robust demand for wholesale loans and the competitive intensity is high in that space. Banks with overheated CD ratios will have their hands tied, unable to capitalise on the opportunity. This will eventually mean loss of market share and potential income.

Second, banks may be forced to raise interest rates on deposits to mobilise deposits. Or otherwise, forced to borrow in the market, in the event of deposits not flowing through. Generally, the cost of such borrowings is higher than the cost of deposits. This will cause a compression in their NIMs (Net Interest Margins), in the event of not being able to pass on the higher cost to borrowers. As a result, NIMs may come under pressure, going forward.

How are top banks placed?

As seen in the chart, the CD ratios of the top five banks (in terms of market cap) have been on a rise right from FY21. Some of these banks have witnessed CD ratios similar to current levels prior to FY20. However, given the ratios’ increasing trend in recent years may ‘potentially expose the banking system to structural liquidity issues’, the Governor has flagged concerns.

Of the lot, HDFC Bank has the highest CD ratio. The bank has had a CD ratio of over 105 per cent ever since it inherited the loans of erstwhile HDFC Ltd, thanks to the merger between them. Axis Bank is the next to follow. SBI seems to the one that is comfortably placed of the lot.

During the quarter gone by, all the four private lenders registered healthy mid-teen YoY growth in deposits (deposit growth on an ex-merger basis is considered for HDFC Bank), beating the system-level growth rate of 11 per cent. SBI lagged with an 8 per cent growth rate. Despite the healthy exhibition of deposit growth, the CD ratios remain elevated, thanks to the also healthy credit growth.

An analysis of the management commentaries of these banks indicates a couple of common trends — optimism around deposit growth without an increase in interest rates and caution in credit growth, going forward. This apart, RBI had introduced draft guidelines on increased LCR from April 1, 2025, based on the proportion of deposit accounts with access to internet or mobile banking. With the possibility of this materialising and the imminent rate cuts, it remains to be seen if banks can showcase growth while also holding on to their NIMs. This will be one of the key monitorables for banking stocks over the next few months.

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