23 Jul, 2025
4 mins read
The credit to deposit ratio (CD ratio) is a key financial metric used in banking to assess how efficiently banks utilise their deposits to issue credit. In simpler terms, it tells us how much of the money collected from depositors is being lent out to borrowers.
A high CD ratio suggests aggressive lending, while a low CD ratio may indicate cautious lending behaviour or weak credit demand. Policymakers and analysts closely watch this ratio as a real-time reflection of banking activity and broader economic momentum.
The CD ratio formula is:
CD Ratio = (Total Credit / Total Deposits) × 100
Where:
Total Credit refers to the loans and advances made by banks.
Total Deposits includes all customer deposits, such as savings, current, and term deposits.
For example, if a bank has ₹80 crore in total loans and ₹100 crore in deposits, the CD ratio will be:
(80 / 100) × 100 = 80%
This means ₹80 out of every ₹100 deposited is being lent to borrowers.
When the credit to deposit ratio of banks falls below a threshold like 80%, it may signal reduced credit demand or cautious lending by banks. Both scenarios have wider implications.
Sluggish demand for credit: A low CD ratio may reflect tepid borrowing by businesses and individuals, pointing to weak investment appetite or economic uncertainty.
Cautious lending stance: Banks may be holding back credit disbursement due to concerns over asset quality or macroeconomic risks.
Higher liquidity in the system: Banks end up parking more funds in government securities or with the central bank, which could reduce potential returns and slow economic growth.
Impact on GDP growth: Since credit is a key driver of investment and consumption, a falling CD ratio could be a drag on India’s GDP growth rate in the medium term.
In short, a persistently low CD ratio is a red flag that deserves close attention.
Several structural and cyclical factors have contributed to the recent decline in lending growth across India’s banking sector:
With the RBI raising interest rates to manage inflation, borrowing costs have gone up. This has led to lower credit demand from both corporates and retail borrowers.
Despite government capex picking up, private sector investment remains cautious. Uncertainty around global demand, input costs, and policy changes has kept corporate borrowing in check.
Banks remain wary of lending to sectors with a history of high NPAs (non-performing assets), especially small and medium enterprises (SMEs). This risk aversion contributes to a more conservative lending approach.
Post-pandemic, banks have continued to receive strong deposit inflows, leading to excess liquidity. However, lending has not kept pace, driving down the overall CD ratio in banking.
The fall in credit to deposit ratio is not uniform across the sector. A closer look reveals that:
Public sector banks have seen sharper declines in their CD ratios due to conservative lending practices and limited exposure to high-growth retail credit.
Private sector banks, while more aggressive in lending, are also witnessing moderated growth amid rising interest rates.
Rural and cooperative banks often face a unique set of constraints, including deposit mobilisation challenges and lending caps, resulting in uneven CD ratios.
Large corporates have reduced their dependence on bank loans, turning instead to bond markets or internal accruals.
In contrast, retail lending, especially unsecured personal loans, continues to grow, but not fast enough to offset the slowdown in other segments.
Historically, India’s credit deposit ratio of banks has hovered between 75% and 80%. The current dip below 80% is noteworthy because:
It coincides with a time when the economy is expected to accelerate.
It follows a phase of post-pandemic recovery, where lending was expected to pick up meaningfully.
Despite strong deposit growth, banks are not deploying capital aggressively, suggesting caution in the system.
This is in contrast to the pre-2010 period, where CD ratios often exceeded 85% due to buoyant credit cycles. The cautious approach now reflects a changed credit landscape—marked by regulatory oversight, capital adequacy concerns, and focus on asset quality.
A drop in the credit to deposit ratio below 80% is more than just a banking statistic—it reflects the broader mood of the Indian economy. While rising deposits indicate public confidence in the banking system, slow credit offtake reveals lingering caution among both borrowers and lenders.
Understanding the CD ratio formula and its underlying drivers helps decode how ready the economy is to absorb credit and fuel growth. For India to sustain strong GDP growth, lending must pick up meaningfully across sectors—backed by policy stability, healthy balance sheets, and renewed business confidence.
Until then, the low CD ratio serves as a cautionary marker—a reminder that recovery is uneven, and systemic support is still crucial.
The CD ratio shows how much of the deposits collected by a bank are being used for lending. It reflects the bank’s lending efficiency and liquidity management.
The CD ratio is calculated as:
(Total Credit / Total Deposits) × 100
A falling CD ratio may suggest weak credit demand, cautious lending by banks, or excess deposit accumulation without equivalent loan disbursement.
While there’s no fixed ideal, a CD ratio between 75% and 85% is generally considered healthy. Too low indicates underutilised funds; too high could mean liquidity stress.
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