Analysing financial stability: Examining the credit to deposit ratios of India’s leading banks

The credit-to-deposit ratio (CDR) is a vital indicator in the banking world, reflecting the delicate balance between lending and deposit growth. It tells us how much of the money people entrust to banks in the form of deposits is being extended as loans to fuel economic activity.

What is the CDR? 

Simply put, the CDR is calculated by dividing a bank’s total outstanding loans by its total deposits. A ratio of 80%, for example, indicates that for every Rs 100 deposited, the bank has lent Rs 80 to borrowers.

Why is the CDR important? 

Liquidity and Risk: A healthy CDR ensures banks have enough funds to meet their depositors’ withdrawal needs while maintaining sufficient reserves for unforeseen circumstances. A very high CDR, however, can lead to liquidity concerns, while a very low CDR suggests sluggish lending and economic growth.

Profitability: Banks earn revenue by charging interest on loans. A higher CDR translates to greater interest income, but also potentially higher risk of loan defaults. Finding the right balance is crucial for optimizing profitability.

Economic Growth: A rising CDR can indicate increased demand for credit, which can stimulate economic activity. Conversely, a falling CDR might signal a slowdown in borrowing, potentially impacting growth.

Factors Affecting the CDR 

Higher interest rates can discourage borrowing and attract deposits, lowering the CDR. Conversely, lower rates can entice borrowing and pull down deposits, increasing the CDR.

A strong economy with robust business activity often leads to a higher CDR as businesses seek loans for expansion. Conversely, economic downturns can dampen borrowing and raise the CDR.

Central banks sometimes set minimum or maximum CDR levels to manage liquidity and risk within the banking system.

Monitoring the CDR 

HDFC Bank: The CDR of HDFC Bank has experienced fluctuations, starting at 87.80% in Q4FY22 and declining to 85.00% in Q4FY23.There’s a significant surge in Q1FY24, reaching 108.70%, followed by a slight decrease in Q2FY24 to 108.40%. This substantial increase could indicate an expansion in lending activities or a change in the deposit composition.

ICICI Bank: ICICI Bank’s CDR has shown a relatively stable trend, with a slight increase from 80.70% in Q4FY22 to 86.30% in Q4FY23. Q1FY24 and Q2FY24 see a slight decline in CDR, suggesting a conservative stance in lending.

Axis Bank: Axis Bank has consistently increased its CDR from 86.10% in Q4FY22 to 93.90% in Q2FY24.This indicates a more aggressive lending strategy, possibly to capitalize on market opportunities or meet increased demand for credit.

Kotak Mahindra Bank: Kotak Mahindra Bank’s CDR has fluctuated, starting at 87.00% in Q4FY22 and reaching 88.10% in Q4FY23 before declining to 86.90% in Q2FY24.The bank appears to be adjusting its lending practices, possibly to manage risk or align with changing market conditions.

IDFC First Bank: IDFC First Bank’s CDR is relatively high, starting at 122.20% in Q4FY22 and gradually decreasing to 104% in Q2FY24. The bank may be working towards optimizing its loan portfolio or ensuring a healthier balance between loans and deposits.

The Federal Bank: The Federal Bank has maintained a steady CDR, with a slight increase from 79.80% in Q4FY22 to 82.50% in Q2FY24. This suggests a balanced approach to lending and deposit management.

Indusind Bank: Indusind Bank’s CDR has seen a gradual increase from 81.50% in Q4FY22 to 87.70% in Q2FY24. The bank might be focusing on expanding its loan book to generate additional revenue.

The CDR is just one piece of the puzzle when assessing a bank’s health or the overall economic climate. It should be considered alongside other factors like asset quality, capital adequacy, and economic growth forecasts.

The credit-to-deposit ratio is a valuable tool for understanding the interplay between banks, depositors, and borrowers. By monitoring the CDR and its underlying factors, policymakers, investors, and everyday citizens can gain valuable insights into the health of the banking system and the broader economy.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.