#Credit - Business Outrank

A high credit-deposit ratio beyond a certain level begins to be detrimental to the bank's profits, as a recent research report by the State Bank of India showed. The report observes that incremental returns are undermined by too much dependence on credit growth. We find this evaluation happening when the banking system of India is performing with high levels of lending. In the case of state-owned and private sector banks, SBI Research estimates an ideal credit-deposit ratio of between 76 and 80%. In the case of foreign banks, the amount proposed is lower, i.e., 65% to 70%. Out of such thresholds, beyond them, profitability gains would begin to decline rapidly as costs of funding and liquidity risks rise. This report points out that there has been an upsurge in the credit-deposit ratio of India in the last 20 years. It rose to 82, as of December 15, 2025, after starting with 53% in 2000 01. SBI explains this increase by the further financialisation and the increased demand for formal credit in sectors. The first half-year FY26 data indicate an offset in the growth of the deposits and credit. The incremental deposits decreased to 8.1 trillion against 8.6 trillion of the same last year. Conversely, incremental credit has increased to 7.6 trillion as compared to 7.4 trillion, a recorded borrowing demand. SBI reported that incremental credit-deposit ratios were over 100% on a number of occasions. This is an indication that banks borrowed in excess of the deposits mobilised and resorted to alternative sources of funding. These cases have been reported eight times since 1950-51, with the ratio recording 99% in 2005-06. Although an increase in the credit-deposit ratio is a good indication of stronger credit intermediation, SBI has warned of the continued high levels. High ratios may put pressure on the liquidity reserves and dependence on borrowing in the market. We feel that this may increase the risk of financial instability, particularly at times when the liquidity becomes tight or when the market is volatile. Sharp regional inequalities were also mentioned in the report. The credit-deposits ratio is more than 90% in Western and southern India. On the contrary, the eastern and north-eastern ones do not exceed 50 percent. Large states like the Odishas and others like Bihar, Jharkhand, and West Bengal have ratios less than 52%. SBI noted that there was a change in household savings behaviour in various states. States such as Gujarat, West Bengal, Madhya Pradesh, Andhra Pradesh, and Karnataka recorded the transfer of deposits of banks to financial markets between FY20 and FY25. To some extent, this trend can justify the inability to grow deposits even with an increase in credit demand. Mismatches in maturity on the bank balance sheets were also raised as a red flag in the report. The six-month and three-year buckets have deposit gaps and advances. The presence of a 35% ratio advances in the one to three years range is an indication of greater prepayments. This is yet another reason why banks need to take caution in enhancing growth and stability at the same time.

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Optimal Credit-Deposit Ratio at 76–80%, Says SBI

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