High Credit-Deposit Ratio Alone Does Not Point to Bank Funding Vulnerability

A high credit-deposit (CD) ratio does not, by itself, indicate funding vulnerability in a banking system experiencing strong credit growth, according to the latest RBI Bulletin.

Since FY23, bank credit growth has consistently outpaced the growth in aggregate deposits, pushing the banking system’s CD ratio above 80 per cent. The widening gap has raised concerns over the sustainability of credit expansion.

However, the RBI Bulletin noted that deposits do not necessarily have to be mobilised before banks extend credit in the modern monetary system. Deposits can be created simultaneously when banks lend or invest, meaning they may not always act as a binding constraint on 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 said.

Banks ultimately determine their lending decisions based on profitability considerations within the prevailing regulatory framework. Where lending provides a better risk-adjusted return than alternative uses of funds, banks can continue expanding credit, the Bulletin explained.

The study concluded that the CD ratio alone may therefore not be an appropriate measure for assessing the funding vulnerability of a banking system experiencing high credit growth.

The recent increase in India’s CD ratio has also coincided with economic expansion and a sound banking system, with prudential requirements being adequately met at the system level, the Bulletin said.

The high CD ratio recorded at the end of March 2026 was partly attributed to adjustments on the liability side, including higher borrowings at lower costs than in earlier periods and increased capital.

Changes in the composition of banks’ assets also supported credit growth, including the redeployment of reserves and other balances towards lending, according to the RBI.

Private investment gains momentum

Another article in the RBI Bulletin highlighted the growing role of private corporate investment in driving economic growth.

The total cost of projects sanctioned by banks and financial institutions, as well as the number of such projects, increased during 2025-26 compared with the previous year, pointing to an improvement in private-sector investment activity.

Infrastructure continued to account for the largest share of envisaged capital investment, led by the power sector.

The Bulletin said planned capital expenditure by private corporates in 2025-26 was higher than the capex planned during the previous year.

The phasing profile of pipeline projects across all financing channels indicates that envisaged capital expenditure is estimated at Rs 3.2 lakh crore in 2026-27, suggesting continued momentum in private investment.

The findings point to sustained credit expansion alongside improving private investment activity, even as the banking system’s funding dynamics evolve with changes in deposits, borrowings, capital and asset deployment.