Below 80%: The Credit-to-Deposit Puzzle in Indian Banking

The credit-to-deposit (CD) ratio in Indian banks continues to linger below the 80% mark, reflecting a deceleration in credit demand across the economy. According to the latest report from CareEdge Ratings as of early August 2025, credit growth has been trailing deposit growth, resulting in a cautious lending environment. This newsletter explores the key facets of this development, including the factors driving subdued credit offtake, sector-specific impacts, and the broader implications for the banking sector and economy.

Key Highlights on Credit-to-Deposit Ratio and Banking Trends

The aggregate CD ratio has remained below 80% for several consecutive fortnights, standing at approximately 79 to 79.5% based on recent data, signaling that banks are utilizing less than 80% of deposits mobilized for lending purposes.

Deposits continue to grow steadily, albeit at moderate rates—around 10.2% year-on-year with over Rs 233 lakh crore in total deposits as of late July 2025—while credit growth has slowed to about 10.2% year-on-year, a marked dip from the 13.8% growth seen in June 2024.

This gap between deposit and credit growth partly owes to a higher base effect and subdued demand for bank loans, especially from key sectors such as agriculture, industry, services, and personal loans.

Sector-Wise Credit Growth Slowdown

Agriculture and allied activities recorded credit growth of only about 6.8% year-on-year in June 2025, down sharply from 17.4% a year earlier, indicating weaker rural credit demand.

Industrial credit growth eased to 5.5%, with a mixed picture across industries: while some sectors like engineering, construction, and textiles posted moderate gains, overall demand remains restrained. Micro, small, and medium enterprises (MSMEs) maintained relatively steady credit uptake amidst the broader slowdown.

Services sector credit growth declined to roughly 9.6%, down from 15.1% the previous year, affected largely by a drop in borrowing by non-banking financial companies (NBFCs).

Personal loans witnessed slower growth of about 14.7%, compared with 16.6% previously, impacted by decreases in segments such as vehicle loans and credit card advances.

Underlying Causes for the CD Ratio Trend

The Reserve Bank of India’s (RBI) monetary policies and regulatory interventions, including higher risk weights on unsecured consumer lending and stricter norms on exposures to NBFCs, have contributed to a tighter lending environment.

Banks are showing caution in expanding their loan books due to macroeconomic uncertainties, interest rate volatility, and concerns over credit quality amid a slowing global economy.

Deposit base expansion is steady, supported by safe savings habits and stable household and institutional inflows, but competition in the bulk deposit segment and consumer preferences are shifting towards non-bank investment avenues.

The CD ratio also reflects the after-effects of recent banking sector mergers, such as the HDFC Ltd and HDFC Bank merger, which elevated lending portfolios without a proportionate increase in deposits.

Broader Banking Sector and Economic Implications

A CD ratio below 80% suggests banks have sufficient liquidity buffers, reducing stress on fund mobilization but possibly indicating underutilized capacity to support economic growth through credit.

Slow credit growth can affect businesses' and consumers’ access to financing, potentially dampening capital expenditure, consumption, and economic expansion if the trend persists.

On the positive side, moderated credit growth allows banks to focus on asset quality improvement, lending discipline, and financial stability, which are crucial amid evolving risk landscapes.

Public sector banks have outpaced private banks in credit growth for the first time in over a decade, reflecting strategic shifts and policy focus on priority lending sectors.

Looking Ahead

With the RBI expected to maintain accommodative monetary policies, efforts may be directed at incentivizing credit flow while balancing inflationary pressures.

The government’s push towards infrastructure spending and credit support for MSMEs could help revive loan demand in key sectors.

Banks will likely continue strengthening risk management, digital lending platforms, and customized loan products to stimulate borrowing aligned with evolving economic scenarios.

In summary, the ongoing situation where the credit-to-deposit ratio remains below 80% highlights a cautious credit environment shaped by subdued demand, regulatory measures, and macroeconomic factors. While this restraint supports financial stability, it underscores the need for calibrated policy actions to revive credit growth that fuels economic activity.

Source: CareEdge Ratings report August 2025, Reserve Bank of India June 2025 data, Economic Times banking updates August 2025, Moneycontrol financial reports August 2025