- A high credit-deposit ratio alone does not indicate banking system vulnerability
- Credit growth has outpaced deposits, pushing CD ratio above 80% since FY23
- Deposits are created concurrently with lending in the modern monetary system
A high credit deposit (CD) ratio may not, by itself, indicate vulnerability in a banking system witnessing high credit growth, according to the Reserve Bank of India's monthly bulletin released on Friday. The growth in the ratio also conincides with strong economic growth and supported by higher borrowings at lower costs, it pointed.
In the RBI bulletin for September 2026, it was noted that growth in bank credit has majorly outpaced that of aggregate deposits, pushing the credit-deposit (CD) ratio above 80% since FY23.
What factors are driving credit-deposit growth?
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According to the bulletin, deposits are created at the same time when banks lend or invest in the modern monetary system. Banking system might not necessarily need to mobilise liabilities such as deposits before extending credit. Deposits, hence, may not be a binding constraint to create credit.
Further, profitability considerations, movement of deposits between bank and regulation would align credit growth with underlying economic conditions.
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Banks eventually decide to extend credit based on their profitability considerations, within the regulatory framework. Where lending offers a better risk-adjusted return than the alternative uses of funds, banks continue to expand credit.
Against this backdrop, CD ratio alone may not be an appropriate metric to gauge funding vulnerability of a banking system that is experiencing high credit growth, the RBI bulletin said.
The recent growth in CD ratio in India, it added, also coincides with a growing economy and sound banking system, where targets are adequately satisfied at system level. By March 2026, the high CD ratio was due to liability side adjustments such as higher borrowings at lower cost than earlier periods, and higher capital. Additionally, changes in composition of assets, by redeploying reserves and other balances, also boosted credit flow.
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