Are banks pushing too far? SBI Research flags risks as credit-deposit ratio jumps to 79%

India’s banking system is seeing a sustained rise in its credit-deposit (CD) ratio, a trend that reflects strong loan demand but could strain liquidity buffers and increase reliance on market funding if it remains elevated, State Bank of India’s research unit said.

The CD ratio of scheduled commercial banks climbed to about 79% in fiscal year 2024–25 from around 69% in FY21, as credit growth continued to outpace deposit mobilisation, according to a report released this week by SBI Research.

“The incremental CD Ratio numbers, which crossed 100% in a number of instances, shows the increasing demand for credit, despite lean deposits,” the report said.

“While a rising CD ratio reflects improved credit intermediation and stronger demand for bank lending, persistently high levels can strain banks’ liquidity positions, reduce available buffers and increase dependence on market-based funding,” it added.

Deposit growth has lagged partly due to a shift in household savings towards financial markets, even as demand for loans has remained robust across retail and corporate segments, the report noted.

SBI Research also flagged a sharp expansion in unsecured lending, with such loans accounting for nearly a quarter of total bank advances in FY25, up from less than 18% two decades ago.

The report highlighted a sharp rise in unsecured lending, which rose to 24.5% in FY25 from 17.7% in FY05, raising risk sensitivity.

Banks’ exposure to sensitive sectors such as real estate and capital markets has also risen steadily, reaching nearly 27% of total advances, the report added.

The study highlighted maturity mismatches between deposits and advances, with a higher share of loans concentrated in the one-to-three-year bucket compared with deposits, a pattern that could add to rollover and liquidity pressures.

Based on an econometric assessment, SBI Research said profitability gains from higher lending diminish sharply beyond a CD ratio range of 76%–80% for public and private sector banks.

Despite the emerging pressures, the report said Indian banks’ balance sheets remain stronger than in the past, with improved capital adequacy and a recovery in public sector banks’ lending activity following years of stress.