Paper
The Credit-deposit Ratio: Time for a Re-think?
Should Indian banks reduce their credit-deposit ratios?
2 pages
This paper calls for a reduction in credit-deposit ratios (CDRs) of public-sector banks (PSBs) in India. It states that although the Reserve Bank of India initially proposed CDRs as a means to correct the rural-urban bias in their lending portfolios, CDR is currently seen as a means to assess PSBs’ commitment to rural and semi-urban sectors. The paper observes that in the past 32 years, there have been inconsistent trends of CDR growth and decline across regions.
Arguing that the increasing number of alternative sources of credit and variety of savings options for the poor has altered the dependence on CDR as an indicator of rural financial health, the paper recommends that:
- CDR should be computed based on the place of utilization of credit rather than the place of sanction;
- Banks should decrease CDR by offering appropriate savings services for the poor;
- State governments should work towards developing rural infrastructure and building an enabling environment for banks to lend.
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