High credit-deposit ratio does not signal funding vulnerability: RBI report
Distilled Policy Brief
- The report highlights that a high CD ratio does not signal funding vulnerability or indicate insufficient deposit mobilisation, as loans result in deposit creation and the metric must be assessed alongside liquidity, capital, and investment-deposit indicators.
- According to the report, the banking sector remains strong with a gross non-performing asset ratio of 1.8 per cent, a capital adequacy ratio of 17.7 per cent, and a liquidity coverage ratio of 124.2 per cent in 2026.
🎯 Prelims High-Yield Examination Points
What is the Credit-Deposit (CD) ratio in banking, and how does it relate to Liquidity Coverage Ratio (LCR) and Capital Adequacy Ratio (CAR) as per recent RBI findings?
⚖️ Mains Analytical & Syllabus Linkages
Analyze whether a high credit-deposit ratio signifies structural funding vulnerability in the Indian banking system, and discuss the broader dynamics of credit creation and deposit mobilisation.
🎯 UPSC Prelims Practice Drill
With reference to the Reserve Bank of India (RBI) report on the credit-deposit (CD) ratio, consider the following statements: 1. A high CD ratio by itself necessarily signals funding vulnerability and insufficient deposit mobilization in the banking sector. 2. In a modern banking system, loans extended by banks themselves result in the creation of deposits. 3. The CD ratio should be evaluated alongside other prudential indicators such as liquidity, capital, and investment-deposit metrics. Which of the statements given above are correct?
- [A] 1 and 2 only
- [B] 2 and 3 only
- [C] 1 and 3 only
- [D] 1, 2 and 3
▶ Reveal Official Answer & Analytical Explanation
According to the RBI report, a high credit-deposit (CD) ratio does not signal funding vulnerability or indicate insufficient deposit mobilisation, making statement 1 incorrect. The report explicitly notes that loans themselves result in the creation of deposits, and the CD ratio must be assessed alongside liquidity, capital, and investment-deposit indicators, making statements 2 and 3 correct.
🏛️ Historical Twin PYQ Anchor (2021)
Consider the following statements regarding the "National Clean Air Programme (NCAP)": 1. It is implemented by the Ministry of Environment, Forest and Climate Change. 2. Central Pollution Control Board acts as the sole regulatory executive body.