India's High Credit-Deposit Ratio: Is the Banking System Overstretched or Just Efficient?
India's scheduled commercial banks achieved a significant milestone at the end of 2025, with the credit-deposit (CD) ratio reaching 81.75%—the highest level recorded since the 2000-01 financial year. This development has sparked intense debate among economists and banking experts about whether this represents efficient fund deployment or potential systemic risk.
The Significance of Rising CD Ratios
Traditionally, a high CD ratio is viewed as a positive economic indicator, suggesting that banks are effectively channeling deposits into productive loans. CD ratios typically rise during periods of economic expansion, when credit demand increases and business activity accelerates. However, the Reserve Bank of India has historically cautioned banks about excessively high CD ratios, though it has never specified an ideal benchmark level.
The current discussion centers on whether India's banking system has reached a threshold where high CD ratios might compromise financial stability, or whether they simply reflect efficient capital allocation in a growing economy.
Divergence Between Public and Private Sector Banks
A granular analysis of banking data reveals significant differences between public sector banks (PSBs) and private sector banks:
- Private banks have consistently maintained higher CD ratios than their public sector counterparts over the past two decades
- The gap between private and public bank CD ratios has widened substantially in recent years
- This divergence stems from fundamentally different approaches to credit expansion and deposit mobilization
During the 2022-23 to 2024-25 period, PSBs demonstrated remarkable stability with deposit growth ranging between 8-9.5% and credit growth between 12-14.5%. In contrast, private banks exhibited much more volatile patterns, with deposit growth swinging from 12-20% and credit growth ranging dramatically between 9.5% and 28%.
Structural Advantages of Public Sector Banks
Public sector banks benefit from several structural advantages that contribute to their relatively stable CD ratios:
- Sticky deposit profiles with approximately 67% of deposits coming from households
- Significant portions held in savings accounts (33%) and from rural/semi-urban regions (31%)
- These characteristics create a more predictable and stable deposit base compared to private banks
Exceptional Cases and General Trends
Certain private banks have experienced extraordinary CD ratio fluctuations due to merger activities. HDFC Bank's merger with HDFC Limited temporarily pushed its CD ratio to 110% as the bank inherited substantial loan assets without corresponding deposits. Similarly, IDFC First Bank began with a 137% CD ratio following its merger, though it successfully reduced this to 94.7% by September 2025.
Beyond these exceptional cases, private banks generally face stretched CD ratios because their loan growth has consistently outpaced deposit growth. For instance, ICICI Bank's credit-deposit ratio increased from 85.4% in December 2024 to 87.4% by December 2025.
Post-Pandemic Drivers of Rising CD Ratios
The increase in CD ratios across both banking segments in recent years stems from two primary factors:
- Lower deposit accretion as savers increasingly shift toward financial markets
- Robust credit demand fueled by monetary easing and GST reductions
Research from the State Bank of India indicates that financial market participation grew significantly faster than incremental deposits in key Indian states during 2020-25. This financialization of savings represents a structural shift away from traditional bank deposits.
On the credit side, 2025 witnessed particularly strong demand for consumer loans, with personal loans growing at an average rate of 12%, driven primarily by vehicle and housing finance.
Potential Risks of High CD Ratios
While current CD ratios remain within manageable limits, banking experts identify several potential risks when ratios approach or exceed certain thresholds:
- Liquidity constraints could emerge if significant deposit withdrawals occur simultaneously
- Increased reliance on higher-cost borrowings to fund loan assets, raising overall funding costs
- Potential deterioration in loan quality when credit expansion becomes excessively aggressive
The mathematics of banking regulations further clarifies these constraints. For every ₹100 in deposits, banks must allocate approximately ₹3 for cash reserve requirements, ₹18 for statutory liquidity ratios, and an additional ₹2-4 as safety buffers. This leaves only 75-77% of deposits available for lending under normal circumstances.
Current System Stability Indicators
Despite rising CD ratios, several key indicators suggest the Indian banking system remains fundamentally healthy:
- Non-performing assets are at multi-decade lows across all bank categories
- Liquidity coverage ratios exceed 100% for all banking groups, well above regulatory requirements
- Borrowing costs decreased in 2024-25 due to improved systemic liquidity and policy rate reductions
These factors collectively indicate that, when viewed alongside liquidity metrics, asset quality, and funding costs, the rising CD ratio does not currently threaten banking system stability.
Rethinking Traditional Metrics
The current debate has prompted calls for modernizing how we measure banking system strength. Many banking experts advocate for including borrowings and reserves in the denominator of CD ratio calculations. Such modified ratios suggest that Indian banks might actually have additional lending capacity without increasing liquidity risk.
This perspective shifts the narrative from alarm about cyclical spikes to recognition that traditional metrics may need updating to reflect contemporary banking realities. Rather than signaling overextension, current CD ratios might indicate that banks are efficiently utilizing both deposit and non-deposit funding sources to support economic growth.
The evolving nature of India's financial system, with increasing financialization of savings and diversified funding sources, suggests that traditional CD ratio interpretations require contextual understanding rather than blanket concern.
