Credit-deposit Ratio

In News

• Recently, as per the RBI data, the Credit-Deposit (CD) ratio of the Northern and Western Regions declined in 2022 while that of the North-Eastern, Eastern, Central and Southern Regions improved.

What is credit-to-deposit (CTD) or loan-to-deposit ratio (LTD)? 

• The credit-deposit ratio broadly means the ratio of assets and liabilities of the banks.
• It is used for measuring a bank’s liquidity by dividing the bank’s total loans disbursed by the total deposits received. 
• It indicates how much of a bank’s core funds are being used for lending which is the main banking activity
• CTD ratio helps in assessing a bank’s financial health. 
  • A higher ratio indicates that the loans disbursed are more than the deposits and vice-versa.

Limitations

• The LDR does not measure the quality of the loans that a bank has issued. 
• The LDR also does not reflect the number of loans that are in default or might be delinquent in their payments.

Importance

• If the ratio is too low: banks may not be earning as much as they should and it also indicates that banks are not mobilizing their resources fully.
• If the ratio is too high: it means that banks might not have enough liquidity to cover any unforeseen fund requirements, which may cause an asset-liability mismatch.
  • A very high ratio is considered alarming because, in addition to indicating pressure on resources, it may also hint at capital adequacy issues, forcing banks to raise more capital. 

Source: BL