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In all the noise about rising bad loans, a deposit deluge in the aftermath of demonetisation and the collapse of credit growth, it’s time to take stock of where public funds are lying right now in the economy. A credit deposit ratio is a key measure to assess a bank’s liquidity and its health.
What is Credit-Deposit Ratio:
Credit-deposit ratio, popularly known as CD ratio, is the ratio of how much bank lends out of the deposits. It indicates how much of a bank’s core funds are being used for lending, the main activity. Though RBI does not stipulate a minimum or maximum level for the ratio, a very low ratio indicates that banks are not making full use of their resources. Alternatively, a high ratio indicates more reliance on deposits for lending and likely pressure on resources.
Current Trends in Credit-Deposit Ratio:
Data from the Reserve Bank of India shows that the credit-deposit ratio as on 2018 Q2 stood at 75.59%, which means that out of Rs100 deposit, Rs75.59 went towards lending and the rest was used to purchase government bonds. Exactly a year ago, banks had lent Rs72.79 out of every Rs100 deposit and had parked the rest in bonds. The biggest share of credit goes to industry followed by services and individuals, whereas a very little part goes to agriculture.
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