Credit-deposit Ratio

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    • Recently, as per the RBI data, the Credit-Deposit (CD) ratio of the Northern and Western Regions declined in 2022 while that of the North-Eastern, Eastern, Central and Southern Regions improved.

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    What is credit-to-deposit (CTD) or loan-to-deposit ratio (LTD)? 

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    • The credit-deposit ratio broadly means the ratio of assets and liabilities of the banks.
    • It is used for measuring a bank’s liquidity by dividing the bank’s total loans disbursed by the total deposits received. 
    • It indicates how much of a bank’s core funds are being used for lending which is the main banking activity
    • CTD ratio helps in assessing a bank’s financial health. 
      • A higher ratio indicates that the loans disbursed are more than the deposits and vice-versa.

    Limitations

    • The LDR does not measure the quality of the loans that a bank has issued. 
    • The LDR also does not reflect the number of loans that are in default or might be delinquent in their payments.

    Importance

    • If the ratio is too low: banks may not be earning as much as they should and it also indicates that banks are not mobilizing their resources fully.
    • If the ratio is too high: it means that banks might not have enough liquidity to cover any unforeseen fund requirements, which may cause an asset-liability mismatch.
      • A very high ratio is considered alarming because, in addition to indicating pressure on resources, it may also hint at capital adequacy issues, forcing banks to raise more capital. 

    Source: BL