RBI Guidelines on Credit-Deposit (CD) Ratio
The Credit-Deposit (CD) ratio is an important metric used by banks to assess the balance between the loans extended and deposits received. The Reserve Bank of India (RBI) sets certain guidelines to ensure that banks maintain a healthy CD ratio. Here’s what you need to know:
- Ideal CD Ratio Range: The RBI recommends that the ideal CD ratio for banks should be between 60% to 80%. This ensures a balanced credit growth without putting excessive pressure on the bank's liquidity.
- Higher than 80%: If the CD ratio exceeds 80%, it indicates that the bank is lending more than it can support with its current deposits. This is a risky situation and the bank should focus on increasing deposits.
- Lower than 40%: If the CD ratio falls below 40%, it suggests that the bank is not utilizing its deposits effectively for lending purposes. The bank should increase its lending operations while ensuring proper risk management.
- Branch-Level Focus: RBI mandates that banks monitor the CD ratio not just at the overall level but also at the branch level, especially in rural and semi-urban areas, to ensure balanced development.
- Actions for High CD Ratio: If the ratio is too high, the bank may focus on attracting deposits through deposit mobilization campaigns, offering better interest rates, or introducing new deposit schemes.
- Actions for Low CD Ratio: If the ratio is too low, the bank may need to focus on lending by introducing new loan schemes, offering attractive rates, and targeting sectors with credit demand.
The RBI continuously monitors the CD ratio of banks and provides instructions to ensure that banks maintain a healthy ratio, thus safeguarding financial stability and promoting economic growth.