High credit-deposit ratio does not signal funding constraint for banks: RBI
The RBI bulletin clarifies that rising credit-deposit ratios do not signal funding constraints, as banks maintain strong liquidity and capital buffers.
The Reserve Bank of India (RBI) has addressed growing concerns regarding the rising credit-deposit ratio in the banking sector, stating that this metric alone does not indicate a funding shortage or vulnerability within the system. According to the central bank's latest bulletin, scheduled commercial banks remain robust, characterized by strong liquidity and healthy capital levels, even as credit expansion continues to outpace the growth of deposits.
Understanding the Credit-Deposit Dynamics
The RBI's analysis highlights a significant shift in the banking landscape. The credit-deposit ratio of scheduled commercial banks climbed from 68.6 per cent in September 2021 to 82.2 per cent by March 2026. Notably, the incremental credit-deposit ratio had hit a peak of approximately 114 per cent in May 2026 before seeing a subsequent decline.
However, the central bank cautions against viewing this ratio as a standalone indicator of financial stress. Instead, it suggests that the ratio must be evaluated within the context of a bank's broader balance sheet. The report points out that deposits are influenced by various complex factors, including:
- Bank credit and investments
- Foreign capital inflows
- Cash withdrawals and foreign transactions
- Other movements across the wider financial system
Factors Driving the Current Ratio
The recent increase in the credit-deposit ratio is attributed to a combination of factors, including a rise in bank capital and a decline in the investment-deposit ratio. Furthermore, foreign capital inflows, specifically through FCNR(B) deposits, have played a crucial role in strengthening deposit growth and moderating the incremental ratio.
The strength of the deposit base is evident in recent data. As of August 31, 2026, aggregate deposits of scheduled commercial banks grew by 17.8 per cent year-on-year, marking the highest growth rate in 15 years. For comparison, as of September 15, bank credit growth stood at 18.1 per cent, while deposit growth followed closely at 17.3 per cent.
Strong Buffers and Systemic Health
Despite the tightening ratio, the RBI emphasized that the banking sector's fundamental health remains intact. The bulletin highlighted several key indicators of stability:
- Liquidity Coverage: Banks are maintaining a liquidity coverage ratio of approximately 125 per cent.
- Asset Quality: Gross non-performing assets (NPAs) have dropped to historic lows.
- Capital Adequacy: Capital levels remain significantly above the required regulatory thresholds.
The report also noted a shift in the government securities market, where non-bank financial institutions (NBFIs) have now overtaken commercial banks as the largest holders of government securities.
A Holistic View for the Future
Looking ahead, the central bank advises that the credit-deposit ratio should not be used in isolation to judge whether the banking system can sustain credit growth. A more accurate assessment requires a comprehensive look at deposits, capital, borrowings, investments, foreign assets, and overall liquidity conditions.
Ultimately, the RBI concluded that the current rise in the ratio is a reflection of a growing economy and a sound, well-regulated banking system that continues to meet all prudential requirements.