Reserve Bank of India: High credit-deposit ratio does not signal bank vulnerability

The Reserve Bank of India (RBI) stated in its latest Bulletin that a high credit-deposit (CD) ratio does not necessarily indicate funding vulnerability within a banking system experiencing high credit growth.

Since fiscal year 2023, bank credit growth has significantly outpaced aggregate deposits, driving the CD ratio above 80 per cent. While this gap has raised concerns regarding the sustainability of credit growth, the RBI noted that in modern monetary systems, deposits are often created simultaneously when banks lend or invest. Consequently, deposits may not act as a binding constraint for credit creation.

The Bulletin highlighted that the recent rise in India's CD ratio coincides with a growing economy and a sound banking system that meets prudential targets. Factors contributing to the high ratio include liability side adjustments, such as increased capital and lower-cost borrowings, as well as changes in asset composition through the redeployment of reserves.