High credit-deposit ratio doesn’t indicate funding vulnerability of banks: RBI Bulletin

New Delhi: A high credit-deposit (CD) ratio may not, by itself, indicate vulnerability in a banking system witnessing high credit growth, the latest RBI Bulletin has said.

Since FY23, growth in bank credit has majorly outpaced that of aggregate deposits, pushing the credit-deposit (CD) ratio above 80 per cent.

The widening gap has raised concerns regarding the sustainability of credit growth.

According to the RBI Bulletin, in the modern monetary system, deposits are created simultaneously when banks lend or invest.

Banking system may not necessarily need to mobilise liabilities (such as deposits) before extending credit. Therefore, deposits might not be a binding constraint for credit creation.

“Subsequently, however, profitability considerations, inter-bank mobility of deposits and prudential regulation would converge credit growth in sync with underlying economic conditions,” the authors noted.

Ultimately, banks decide to extend credit based on their profitability considerations, within the regulatory architecture.

Where lending offers a better risk-adjusted return than the alternative uses of funds, banks continue to expand credit.

“The finding of this study further indicates that CD ratio, by itself, may not be an appropriate metric to gauge funding vulnerability of a banking system that is experiencing high credit growth,” the Bulletin noted.

Further, the recent rise in CD ratio in India also coincides with a growing economy and sound banking system, where prudential targets are adequately satisfied at system level.

The high CD ratio as at end-March 2026 was on account of liability side adjustments such as higher borrowings at lower cost than earlier periods, and higher capital.

Moreover, changes in composition of assets, by redeploying reserves and other balances, also supported credit flow, said the Bulletin.

Another article in the RBI Bulletin said that investment activities by private corporate sector play a significant role in driving economic growth.

The total cost of projects as well as the number of projects sanctioned by banks and financial institutions (FIs) increased during 2025-26 as compared to previous year, indicating improvement in investment activities of private corporates.

Infrastructure sector continued to attract major share of envisaged capital investment, led by ‘Power’ sector.

“Phasing plans indicate that aggregate capex intended by private corporate sector in 2025-26, increased as compared to the planned capex during the previous year. The phasing profile of the pipeline projects based on all channels of financing taken together, suggests that the envisaged capex is estimated at Rs 3.2 lakh crore in 2026-27, indicating sustained momentum in private investment,” the authors noted.

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