Credit-Deposit (CD) Ratio

The credit-deposit ratio, or CD ratio, tells us how much of the money a bank has received as deposits it has given out as loans. If a bank holds ₹100 in deposits and has given ₹80 as loans, its CD ratio is 80%. It is one of the simplest ways to see how actively banks are lending and how they are funding that lending.

How is it calculated?

The formula is simple:

• CD ratio = (Total bank credit ÷ Total deposits) × 100
• "Credit" means loans and advances given by the bank.
• "Deposits" means savings, current and fixed deposits kept by the public.

There is also the incremental CD ratio. It compares only the new loans given during a period with the new deposits received in that same period. If banks gave ₹120 of new loans while getting only ₹100 of new deposits in a year, the incremental CD ratio is 120%. This shows the direction of change much faster than the overall ratio.

Why does it matter?

A bank is a middleman for money in the economy. The CD ratio shows how well it is doing this job.

• A very low CD ratio means the bank is collecting money but not lending much. Money from savers is not reaching farmers, businesses or home buyers. The bank may instead be parking the money in government bonds.
• A very high CD ratio means the bank is lending a large share of its deposits. This supports growth, but it can also mean the bank depends more on costlier or less stable money, such as borrowings, to keep lending.

Think of a family budget. If the family lends out almost everything it earns to relatives, it may struggle when it suddenly needs cash. If it lends nothing, the money just sits idle. Banks face a similar balance.

Why can't the ratio ever reach 100% comfortably?

Banks cannot lend every rupee of deposits. The law makes them keep some aside:

• Cash Reserve Ratio (CRR): A share of deposits kept as cash with the RBI, earning no interest. It was cut in four steps of 0.25 percentage points between September and November 2025, reaching 3% of Net Demand and Time Liabilities (NDTL) from November 29, 2025.
• Statutory Liquidity Ratio (SLR): A share of deposits kept in safe assets like government securities, cash or gold. It is 18% of NDTL.

Together, about 21% of deposits is locked by rule. So if banks lend more than roughly 79% of deposits, they must use other sources of money, such as capital, borrowings or selling extra bonds they hold.

Do banks need deposits before they lend?

Many textbooks say banks first collect deposits and then lend them out. The modern view is different. When a bank gives a loan, it simply credits the borrower's account. That credit is itself a new deposit. So loans create deposits at the moment of lending. The Bank of England explained this clearly in a well-known 2014 paper, "Money creation in the modern economy". This view does not mean banks can lend without limits. Their lending is still held back by:

• Profitability: a loan must earn more than its risk and cost.
• Deposits moving between banks: the new deposit may be spent and move to another bank, so the lending bank must find funds to settle.
• Prudential rules: capital, CRR, SLR and liquidity norms.

India's rules and benchmarks

The RBI does not set any fixed CD ratio limit for banks as a whole. Instead, it controls risk through other tools:

• Liquidity Coverage Ratio (LCR): Under the Basel III rules, a bank must hold enough high-quality liquid assets (like government bonds) to survive 30 days of stressed cash outflows. The minimum is 100%. Revised LCR rules effective April 1, 2026 add an extra 2.5% "run-off" charge on retail deposits that can be withdrawn through internet and mobile banking, because such money can leave very quickly.
• Net Stable Funding Ratio (NSFR): Makes banks fund long-term assets with stable, long-term money. The minimum of 100% applies in India since October 1, 2021.
• Capital adequacy: Banks must hold enough of their own capital against their risky assets.

There is one area where the RBI does use a CD ratio benchmark: financial inclusion. As far back as 1980, the RBI asked public sector banks to reach a 60% CD ratio in rural and semi-urban branches. The revised Lead Bank Scheme guidelines of June 2026 keep a 60% benchmark across rural and semi-urban branches at the all-India level. Districts with low CD ratios get special sub-committees and action plans. The purpose is to stop rural savings from flowing only to big cities.

India's recent trend

From 2022-23, bank credit grew much faster than deposits. Several reasons pushed the ratio up:

• Strong loan demand from households (personal loans, home loans) and businesses as the economy recovered after COVID-19.
• The merger of HDFC Ltd. with HDFC Bank on July 1, 2023. HDFC Ltd. was a housing finance company with large loans but no bank deposits, so the merger added loans to the banking system without matching deposits. Reports estimate it lifted the system's CD ratio by about 2 percentage points.
• Savers moving money from bank deposits to mutual funds, shares and other investments.

As a result, the all-bank CD ratio moved from about 75% in mid-2023 to above 80%, and was around 81.7% at end-March 2026 [Unverified].

Commonly confused concepts

• CD ratio vs Loan-to-Deposit Ratio (LDR): These are the same idea. "LDR" is the name more commonly used outside India.
• CD ratio vs Liquidity Coverage Ratio (LCR): The CD ratio is a simple lending measure with no legal minimum. The LCR is a legal rule about holding liquid assets to survive a 30-day cash crunch.
• CD ratio vs Capital Adequacy Ratio (CRAR): CRAR compares a bank's own capital with its risk-weighted assets. It measures the bank's ability to absorb losses, not how much it lends from deposits.
• CD ratio vs Investment-Deposit ratio: The investment-deposit ratio shows how much of deposits banks have put into securities like government bonds. When banks sell bonds to lend more, this ratio falls while the CD ratio rises.
• Overall vs incremental CD ratio: The overall ratio uses total stock. The incremental ratio uses only the change in a period, so it can be above 100% even when the overall ratio is around 80%.

Issues, criticism and the way forward

• Funding risk: When deposits grow slowly, banks rely more on borrowings and certificates of deposit, which are costlier and can dry up in a crisis. This can squeeze bank profits (net interest margins).
• Competition for deposits: Banks raise deposit rates to attract money, which makes loans costlier for borrowers.
• Shift of household savings: More people invest in mutual funds and markets. Deposits are no longer the only home for savings, so the old "deposit first" funding model is changing.
• Is a high ratio really a danger? The RBI Bulletin article argues that the CD ratio alone is not a good measure of funding vulnerability. It says the recent rise happened in a growing economy with a sound banking system, where prudential targets are met at the system level. Critics still watch for pockets of stress in individual banks.
• Regional gaps: Some states, especially in the east and northeast, have low CD ratios. Their savings fund lending elsewhere. The Lead Bank Scheme tries to fix this.
• Way forward: Experts suggest better deposit products, digital outreach, a focus on stable retail deposits and close monitoring of liquidity rules (LCR, NSFR) rather than any single ratio.

Concepts to Know

• Net Demand and Time Liabilities (NDTL): Basically the total deposits and similar liabilities a bank owes to the public. Demand liabilities can be withdrawn any time (savings, current accounts). Time liabilities are payable after a fixed period (fixed deposits).
• Basel III: A set of global banking safety rules made after the 2008 global financial crisis by the Basel Committee on Banking Supervision. It covers capital, leverage and liquidity.
• High-quality liquid assets (HQLA): Assets that can be turned into cash quickly without losing value, such as cash and government securities.
• Certificate of deposit (CD): A short-term borrowing paper issued by banks to raise money from the market. Do not confuse this "CD" with the CD ratio.
• Net interest margin (NIM): The difference between the interest a bank earns on loans and the interest it pays on deposits and borrowings, as a share of its assets.
• Lead Bank Scheme: An RBI scheme started in 1969 in which one bank takes the lead role in planning and coordinating credit in each district [Unverified: start year].