The credit-to-deposit ratio takes a hit in 2020

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Loans disbursed by Indian banks as a percentage of deposits have steadily declined in 2020, highlighting the effects of excess liquidity and lack of credit demand.

During calendar year 2020, the credit-to-deposit (CD) ratio steadily declined from 75% in January to 71.3% on December 4, as the hit became evident in the early months of the covid pandemic. -19 as credit growth collapsed.

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The decline in the CD ratio is a consequence of the steady inflow of deposits, which have outpaced credit growth in recent quarters as demand has fallen alongside lenders’ appetite for riskier assets.

Under Reserve Bank of India rules, banks must set aside 3% of deposits as cash reserve ratio (CRR) and a further 18% in assets that meet the statutory liquidity ratio (SLR). The rest, along with other resources, can be used for loans.

“It (falling CD ratio) is an indicator of excess liquidity due to higher deposits with the banking system and lack of alternatives in credit markets. Also, many companies are using bond markets and this is reflected in banks’ investment books, instead of advances,” said Sameer Narang, Chief Economist, Bank of Baroda.

While non-food credit increased by 5.99 trillion between December 6, 2019 and December 4, 2020, deposits increased by 14.86 trillion over the same period. Banks have tried to dissuade savers by lowering interest rates on deposits, but without success.

On the other hand, bankers said there was not much scope for credit deployment in a year battered by covid-19 disruptions. To be sure, some credit growth was introduced by the government’s Emergency Line of Credit Guarantee (ECLGS) scheme, initially targeted at small businesses but later extended to other struggling sectors.

A Care Ratings report said on Dec. 19 that the CD ratio largely held at a similar level in the past two fortnights ending Nov. 20 and Dec. 4 due to slower credit growth. Furthermore, with deposits growing at a much faster rate than lending in the banking system, the resulting glut of liquidity works against the interests of depositors who lose money once adjusted for inflation.

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