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Credit-to-deposit ratios for the banking system in India are at an all time high at 78.52%. In fact incremental credit-deposit ratio has risen to 83%. In medical terminology, this is akin to the banking system gasping for breath, or in this case -- funds.
Banking system in its most basic form is collecting money from depositors at a given rate through saving accounts, current accounts and various other forms of deposits and lending it to borrowers. For every Rs 100 collected, a bank can theoretically lend Rs 100, but the problem arises when some of the depositors want to withdraw.
However, banks are supposed to maintain certain amount with the central bank in the form of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). Presently SLR is 23% and CRR is 4%. In other words 27% of a bank’s funds are locked with RBI and thus only 73% are available for lending.
Now if a bank has a credit-deposit ratio of more than 73%, it means that it is either lending more than its own available resources by borrowing from costlier sources or its deposit collection is not keeping pace with its credit growth.
In the present case, low growth of deposits pose a big problem. Demand for money by borrowers is more than the rate at which people are depositing money in the system. Falling growth rate, rising unemployment and rising inflation has left little money in the hands of depositors who despite high rates are not willing to put in money in the banking system.
Low deposit growth has the potential of threatening growth rate in future, but a high credit to deposit rate can have immediate impact on the financials of banks. Borrowing at high rates and lending it to credit worthy corporates at competitive rates (banks are lending money only to their best customers in the current scenario) will impact net interest margin (NIM) going forward.
What this also highlights is that the country does not have the money needed to spur growth.
