Private banks have pared their credit-deposit (CD) ratios as they focus on a deposit growth higher than advances amid tight liquidity conditions.
The average CD ratio, also known as loan-to-deposit ratio (LDR), has decreased to 90.74% at the end of the December quarter of the current financial year from 94.4% in the same period of FY24, according to data from Capitaline. However, the average CD ratio of public sector banks, which was relatively lower than that of private lenders, increased to 77.8% in the third quarter of FY25 from 76% in the same quarter of FY24. HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank, and IDFC First Bank are among the major private lenders that have seen a year-on-year (y-o-y) decline in their CD ratios.
HDFC Bank, the largest private lender, has seen a significant decline in its CD ratio to 98.2% in the third quarter of FY25 from 110.5% in the third quarter of FY24, as it aims to bring the ratio back to the levels prior to its merger with HDFC Ltd.
“We seem to be progressing well in our journey to normalise our credit-deposit ratio with the deposit growth outpacing our loan growth,” said Shashidhar Jagdishan, CEO, HDFC Bank, during the third-quarter analyst call.
HDFC Bank witnessed a marginal growth of just 3% in gross advances in the third quarter while it deposits increased at a much faster pace of 16%. Following its merger with mortgage lender Housing Development Finance Corporation in July 2023, the bank’s CD ratio had surged past 100%.
IDFC First Bank has seen a y-o-y decline of 624 basis points in its CD ratio in the third quarter, while Yes Bank’s ratio fell by 163 bps and RBL Bank by 151 bps. In case of ICICI Bank, Axis Bank and Kotak Mahindra Bank, the decline was in the range of 15 to 60 bps.
The CD ratio, a key metric to assess banks’ liquidity, indicates how much of the money that banks have raised in the form of deposits has been deployed as loans. A high CD ratio may pose liquidity and credit risk for a lender.
Bankers note that private lenders were aggressively expanding their loan portfolios until last year, often neglecting deposit growth. However, with deposit growth now slowing, these banks are compelled to prioritise building a stronger deposit base and scaling back loan growth.
“Higher LDRs force banks to depend more on borrowings rather than on a stable deposit base, which increases funding costs and compresses net interest margins,” said a senior official of a private bank. “The regulator is also not comfortable with elevated CD ratios of some banks,” he added.
Private lenders have also lowered their CD ratios to align with regulatory expectations. According to bankers, the Reserve Bank of India had last year expressed concerns about high LDR and asked lenders to narrow the gap between credit and deposit growth.
“Deposit competition remains aggressive as many banks are focusing on improving their CD ratios, while competition from PSU banks is also picking up,” noted a report by Motilal Oswal Financial Services.
Banks have intensified their efforts to enhance their liability franchises by offering higher rates on term deposits in the current financial year. Additionally, banks are sourcing funds through certificates of deposit, albeit at a higher cost.
