Credit-to-Deposit Ratio: A Key Metric for Analysing Indian Banks

The Indian banking sector is a dynamic and ever-evolving landscape. For investors looking to make informed decisions, understanding the key metrics that drive a bank’s performance is crucial. One such vital sign that often appears in financial analysis is the Credit-to-Deposit (CD) ratio.

This post will demystify the CD ratio, explaining what it is, why it’s important, and how you can use it to analyse a bank’s financial health.

What is the Credit-to-Deposit Ratio?

At its core, the Credit-to-Deposit ratio is a straightforward metric that measures a bank’s lending activity against its deposit base. It tells you how much of the money a bank has collected in deposits has been given out as loans. It’s a key indicator of a bank’s liquidity and its ability to generate profits.

A high CD ratio suggests that a bank is lending aggressively, while a low ratio might indicate a more conservative approach. Neither is inherently good or bad, but they tell different stories about a bank’s strategy and risk appetite.

How to Calculate the CD Ratio

The formula for calculating the Credit-to-Deposit ratio is simple:

CD Ratio = (Total Loans / Total Deposits) x 100

Let’s take an example. Suppose Bank XYZ has total loans of ₹75,000 crore and total deposits of ₹1,00,000 crore. Its CD ratio would be:

(₹75,000 / ₹1,00,000) x 100 = 75%

This means that for every ₹100 the bank holds in deposits, it has lent out ₹75.

Why the CD Ratio Matters for Investors

The CD ratio is a vital tool for several reasons:

• Liquidity Assessment: A very high CD ratio (e.g., over 90%) could signal that a bank might face a liquidity crunch if a large number of depositors withdraw their money simultaneously.
• Profitability Indicator: Lending is a primary source of income for banks. A higher CD ratio can lead to higher interest income and, consequently, higher profits. However, this often comes with increased risk.
• Economic Health: On a broader scale, the CD ratio of the entire banking system can be an indicator of economic health. A rising CD ratio often signals a growing demand for credit, which can be a sign of economic expansion.

Benchmarking CD Ratios in India

The CD ratio can vary significantly between different types of banks. Historically, private sector banks in India have maintained higher CD ratios compared to public sector banks (PSBs), often due to a more aggressive focus on retail and corporate lending.

According to recent data from the Reserve Bank of India (RBI), the CD ratio for Scheduled Commercial Banks (SCBs) reached 80.2% at the end of March 2025. This has been a point of attention for the RBI, which has encouraged banks to balance their credit and deposit growth.

A Complementary Metric: Operating Income Growth

While the CD ratio is useful, it shouldn’t be viewed in isolation. A complementary metric to consider is a bank’s Operating Income Growth. This shows how well a bank is growing its core income from operations, which primarily includes interest income from loans.

A bank with a rising CD ratio should ideally also show strong operating income growth. If the CD ratio is increasing but operating income is stagnant or declining, it could be a red flag, suggesting that the bank is taking on more risk without a corresponding increase in profitability.

Interpreting the CD Ratio: Healthy Ranges & Red Flags

So, what’s a “good” CD ratio? While there’s no official mandate from the RBI, a range of 70% to 80% is generally considered comfortable and healthy for Indian banks.

• Healthy Range (70-80%): This range suggests a bank is effectively using its deposits to generate income through lending while maintaining sufficient liquidity.
• Low CD Ratio (Below 70%): A low ratio might indicate that a bank is too conservative and not deploying its resources efficiently to maximise profits.
• High CD Ratio (Above 80%): A high ratio can be a cause for concern. It might indicate that the bank is overly reliant on its deposit base for lending and may have limited capacity to absorb unexpected financial shocks.

Practical Tips for Monitoring CD Trends

For investors, monitoring a bank’s CD ratio over time can provide valuable insights. Here are a few tips:

• Track the Trend: Look at a bank’s CD ratio over the last few quarters or years. A consistently rising ratio might warrant a closer look at the bank’s asset quality and provisioning.
• Compare with Peers: As mentioned, always benchmark a bank’s CD ratio against its competitors in the same category (e.g., large private banks vs. PSBs vs. small finance banks).
• Read Management Commentary: In their quarterly reports and investor calls, bank management often provides context for changes in the CD ratio. This can help you understand the strategy behind the numbers.

Conclusion: A Balanced View is Key

The Credit-to-Deposit ratio is a powerful yet simple tool for any investor analysing the Indian banking sector. By itself, it doesn’t tell the whole story. However, when used with other metrics like operating income growth and asset quality, it provides a more complete picture of a bank’s financial health and risk appetite. As with any financial ratio, the key is to understand the context and use it as part of a holistic analysis.

This article is for informational purposes only and does not constitute investment advice. Please conduct your own research before making any investment decisions.