Credit-deposit (CD) ratio

In News: RBI’s data on State-wise C-D ratio of scheduled commercial banks according to place of utilisation was released.

• Ratio of the Northern and Western Regions declined in 2022 even as that of the North-Eastern, Eastern, Central and Southern Regions improved.
• States that saw improvement are: Haryana, Himachal Pradesh, and Rajasthan
• States that saw a decline are: Punjab, Chandigarh, and Delhi

About CD ratio:

• Credit-Deposit Ratio = Total Advances/Total Deposits *100
• It is the ratio of how much a bank lends out of deposits it has mobilised.
• It indicates how much of each rupee of deposit goes towards credit markets in a particular region.
• For example, a CD ratio of 75% means that three-fourth of deposits of banks has been given out as loans.
• A very low ratio indicates banks are not making full use of their resources (i.e. deposits), shows poor credit growth.
• Alternatively, a high ratio indicates more reliance on deposits for lending purposes and may be risky.
• It may become difficult to cover any unforeseen fund requirements, may affect capital adequacy and asset-liability mismatch.
• CD ratio helps in assessing a bank’s liquidity and indicates its health.
• RBI does not stimulate a minimum or maximum level for the ratio.
• It is used as a broad indicator for measuring the inter-State disparities in banking development and the role of banking in economic activity.

Source The Hindu BusinessLine

Previous Year Question

Q.1) Despite being a high saving economy, capital formation may not result in significant increase in output due to (2018)

1. weak administrative machinery
2. illiteracy
3. high population density
4. high capital-output ratio

Q.2) A decrease in tax to GDP ratio of a country indicates which of the following? (2015)

1. Slowing economic growth rate
2. Less equitable distribution of national income

Select the correct answer using the code given below.

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither1 nor 2