India’s scheduled commercial banks concluded 2025 with their credit-deposit (CD) ratio soaring to an unprecedented 81.75%, marking the highest level recorded since the fiscal year 2000-01. This significant metric, which gauges how much of a bank’s deposit base is deployed as loans, traditionally serves as a barometer for banking sector efficiency and the broader economic pulse. A high CD ratio often signals a robust demand for credit, indicative of flourishing economic activity and efficient fund utilization by financial institutions. However, it also prompts a crucial debate among policymakers and economists: Is the banking system merely operating at peak efficiency, or are there underlying pressures that could strain liquidity and stability?
The Reserve Bank of India (RBI) has historically maintained a cautious stance on excessively high CD ratios, without prescribing an explicit ideal threshold. This vigilance stems from the understanding that while credit expansion fuels economic growth, an imbalance between loan origination and deposit mobilization can introduce systemic risks. To fully comprehend the implications of the current trend, a deeper dive into granular data and the evolving components of banks’ balance sheets is essential.
A notable divergence emerges when disaggregating CD ratios by bank group. Over the past two decades, private sector banks have consistently exhibited higher CD ratios compared to their public sector counterparts, a gap that has visibly widened in recent years. This disparity is largely attributable to the distinct operational strategies and customer profiles of these two segments. Private banks, generally characterized by more aggressive growth mandates, tend to be proactive in expanding their loan portfolios and mobilizing fresh deposits through competitive offerings and digital innovations. During the three financial years spanning 2022-23 to 2024-25, private banks experienced a deposit growth ranging from 12-20%, while their credit growth swung widely between 9.5% and 28%. This volatile and often wider gap between credit and deposit accretion directly contributes to their elevated CD ratios.
In contrast, public sector banks (PSBs) displayed more contained growth trajectories, with deposits expanding at 8-9.5% and credit at 12-14.5% within the same period. PSBs also benefit from a inherently stable and sticky deposit base. As of March 2025, approximately 67% of their deposits originated from households, with savings accounts constituting 33% and a substantial 31% stemming from rural and semi-urban regions. These characteristics provide PSBs with a relatively predictable and less volatile funding source, allowing for a more measured approach to lending and deposit management.
Beyond these broad trends, specific structural factors and consolidation activities have also influenced individual bank CD ratios. The merger of HDFC Bank and HDFC Ltd. in 2023-24 serves as a prominent example. HDFC Bank inherited a substantial loan book from the housing finance entity, which was predominantly funded through borrowings rather than deposits. This immediate post-merger effect propelled the merged entity’s CD ratio to an exceptional 110%. The bank has since implemented strategic measures to normalize this ratio, demonstrating a conscious effort to realign its funding mix. Similarly, IDFC First Bank, formed from the amalgamation of IDFC Bank and Capital First, initially recorded a CD ratio of 137%, subsequently brought down to 94.7% by September 2025. While these are indeed exceptional cases driven by unique circumstances, they highlight how significant corporate actions can dramatically alter a bank’s financial metrics and necessitate active balance sheet management.
The overarching trend, however, points to a universal increase in CD ratios across both private and public sector banks in the post-pandemic era. This surge is a confluence of robust credit demand and a notable shift in household savings patterns. A research report from the State Bank of India (SBI) for the period 2020-25 underscored this transformation, revealing that investor participation in financial markets across key Indian states grew at a significantly faster pace than incremental bank deposits. This "financialization of savings" indicates a migration of funds from traditional bank deposits towards higher-yielding investment avenues such as mutual funds, equities, and other market-linked instruments, thereby moderating deposit accretion for banks.
Concurrently, a conducive macroeconomic environment has fueled credit demand. Years of monetary easing, coupled with fiscal support measures and structural reforms like GST rationalization, have stimulated economic activity. Sectoral credit data for 2025 illustrates this dynamism, with personal loans expanding at an average rate of 12%, driven by strong uptake in vehicle and housing finance. This robust consumer demand, alongside renewed corporate investment, has created a fertile ground for bank lending.
While a high CD ratio is generally viewed favorably, indicating efficient capital deployment, there exists a critical threshold beyond which it can pose genuine risks to a bank’s liquidity and overall stability. The underlying mathematics are straightforward: for every ₹100 in deposits, banks are mandated to set aside approximately ₹3 as the Cash Reserve Ratio (CRR) with the RBI and invest about ₹18 in government securities to meet the Statutory Liquidity Ratio (SLR). Additionally, most banks prudently maintain an extra ₹2-4 in liquid assets as a self-imposed safety buffer. This means that, after fulfilling statutory requirements and maintaining operational liquidity, banks are left with only 75-77% of their deposits as lendable resources.
A bank operating with a CD ratio exceeding this natural lendable capacity, particularly above 80%, confronts several challenges. Firstly, it faces tighter liquidity, making it vulnerable if a substantial portion of depositors simultaneously seeks to withdraw funds. Secondly, to sustain aggressive loan growth, such a bank would increasingly rely on higher-cost market borrowings, potentially squeezing its net interest margins and elevating its overall cost of funds. Lastly, an overly aggressive lending strategy, driven by the imperative to deploy funds, can sometimes lead to a relaxation of credit underwriting standards, thereby increasing the risk of future non-performing assets (NPAs).
However, current indicators suggest that these potential risks are not yet manifesting as a threat to the health of the Indian banking system. Non-performing assets (NPAs) across the sector are at multi-decade lows, reflecting improved asset quality and robust recovery mechanisms. Banks’ liquidity coverage ratios (LCRs), a key measure of short-term resilience, remain comfortably above the regulatory benchmark of 100% across all bank groups, indicating sufficient buffers against liquidity shocks. Furthermore, the cost of borrowing for banks actually declined in 2024-25, a testament to improving systemic liquidity conditions and judicious policy rate adjustments by the central bank. Therefore, when viewed holistically alongside trends in asset quality, liquidity metrics, and funding costs, the rising CD ratio, while warranting close monitoring, does not currently signal an imminent threat to the stability of the Indian banking sector.
What this trend unequivocally highlights, however, is a fundamental shift in how banks are funding their balance sheets. Non-deposit sources, particularly market borrowings and internal reserves, are playing an increasingly prominent role in financing loan growth. This evolving funding mix has prompted banking sector executives and some economists to advocate for a re-evaluation of the traditional CD ratio. They propose including these non-deposit liabilities, such as interbank borrowings and institutional reserves, in the denominator of the CD ratio. Such a modified metric, they argue, would offer a more comprehensive and accurate representation of a bank’s lendable capacity and its true liquidity position.
Indeed, if the definition were updated to reflect the full spectrum of funding sources, it might suggest that far from being overstretched, Indian banks possess significant additional capacity to lend without jeopardizing liquidity or financial stability. This perspective suggests that the current "alarm" over a cyclically high CD ratio might be more a function of an outdated metric than an actual systemic vulnerability. As India continues its trajectory of economic growth, propelled by credit expansion, adapting regulatory metrics to contemporary banking realities will be crucial for fostering both efficiency and enduring stability in its dynamic financial landscape.
