Banks are doing okay with credit about to surpass four-fifths of deposits—so does this ratio still matter?

The logic goes this way. If the cash reserve ratio (CRR) is 3% and the statutory liquidity ratio (SLR) 18%—both are mandatory carve-outs from deposits that banks must keep—then the CD ratio cannot be above the residual 79%. Yet, it is so, and none of the norms is reported to have been violated. This implies that the premise of a threshold and the sanctity of the 80% number needs to be revisited.

Data over the last five decades or so shows that the CD ratio was less than 80% until 2023-24. In fact, there were phases when it was in a range of 50-60% (between 1991-92 and 2003-04). Back then, the CRR and SLR were extremely high, which left little room for lending.

Interestingly, in 1990, the SLR peaked at 38.5% and CRR was at 15%. From 2005-06 onwards, the CD ratio has been above 70% but well below 80%, with the peak being 78% in 2012-13. We are clearly in a different phase of banking now.

A few things are relevant here. The raison d’être of financial intermediation is to facilitate lending in the most efficient way. The Reserve Bank of India (RBI) has several regulations, including CRR and SLR mandates, for prudent banking. Both these have been brought down over time to give banks more space to lend. The idea was for banks to take risks and not just stick to safe assets like government paper. Banks have to grow their loan books optimally to use deposits well.

RBI has been assiduously aligning norms with the Basel regulations for the last couple of decades and has changed the regulatory structure to put best practices in place. The latest are its liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) mandates designed to address liquidity issues. These come on top of CRR, SLR and capital adequacy stipulations.

So long as these guideposts are adhered to, banks should ideally be left to manage their resources. It is for banks to ensure that the quality of assets is maintained. When RBI smells a possible problem, though, it introduces new capital norms to curb perceived exuberance.

The point to note is that the resources of banks are not limited to deposits. Deposits typically account for around 75-78% of their liabilities. Other borrowings and their own capital (equity plus reserves) have a share of 17-18%.

Logically, when optimal utilization of funds is being assessed, the resource components of borrowings (mainly through bonds) and capital (reserves that include ploughed-back profits) should also be taken into account.

In fact, the CD ratio should ideally include these two components in the denominator along with deposits to offer a complete picture.

As for bank assets, credit has a share of 60-62%. The balance is deployed in investments and other assets. Interestingly, when the CD ratio rises, the composition of bank assets changes too. In 2025-26, banks have lowered their holdings of government paper.

This has happened because of RBI’s use of open market operations (OMOs) to supply liquidity to the system by purchasing government securities from banks. The investment-deposit ratio has come down by almost 300 basis points, which has been more or less balanced by the rise in the industry’s CD ratio.

RBI has been providing this facility on a near-continuous basis to assist banks that have found it progressively difficult to mobilize deposits in a falling interest rate environment.

Therefore, the industry’s high CD ratio can be looked at in two ways. Either banks are using their capital more effectively by deploying it as loans or they are selling government paper and using these proceeds for lending. Either way, for the sector’s regulator, there should be no major concern so long as all the regulatory stipulations are being complied with.

It should also be noted that India is largely a bank-financed economy, with most formal entities accessing bank loans for their funding. The corporate bond market is large, but access to it is largely limited to AA- or AAA-rated companies. The external commercial borrowing route is also available, but again limited just to big companies with good credit ratings.

Banks also have wide networks, which makes them physically accessible. The technology push of recent years has added to their reach by improving last-mile connectivity. Today, it is imperative that banks use their resources in an optimal manner. True, asset quality is something that has to be monitored regularly, but that is a different subject.

Further, as banks still seem to be doing a good part of the heavy lifting in the field of infrastructure finance, the bonds they issue for this purpose should be accounted for as borrowings. This component is analogous to deposits, except that they have a higher cost attached. This extra cost, however, must necessarily be borne for banks to fund long-term infrastructure projects and ensure that asset and liability maturities do not go perilously out of sync.

All considered, it can be argued that the concept of the credit-deposit ratio needs to be modified to include other borrowings and capital in sources of funding. Also, the thumb rule of 80% may not be too relevant anymore, especially if no regulatory norms are violated by banks.

These are the author’s personal views.

The author is chief economist, Bank of Baroda, and author of ‘Corporate Quirks: The Darker Side of the Sun’