Small Finance Banks Seek Regulatory Flexibility on Credit-Deposit Ratio

New Delhi, Oct 7 (KNN) – Small finance banks (SFBs) in India have approached the Reserve Bank of India (RBI) seeking a revision of the current computational norms for the credit-deposit (CD) ratio.

This move comes as several SFBs have seen their CD ratios surpass the 90 percent threshold, a level that raises concerns about their liquidity positions.

Understanding the CD Ratio:

The CD ratio, also known as the loan-to-deposit ratio, is a key metric used to evaluate a bank’s liquidity. It compares a bank’s total loans to its total deposits over a given period. A higher ratio indicates that a bank may have insufficient liquidity to handle unexpected financial stress or sudden deposit withdrawals.

While large universal commercial banks typically maintain CD ratios between 80 and 90 percent, multiple SFBs have reported ratios exceeding 90 percent.

SFBs’ Challenges:

Notable examples include Suryoday SFB, which reported a CD ratio of 110 percent for the first quarter of fiscal year 2025, and Jana SFB, with a ratio of 102 percent for the same period.

This disparity between SFBs and larger banks in terms of CD ratios highlights the unique challenges faced by smaller financial institutions in managing their loan portfolios and deposit bases.

Call for Regulatory Flexibility:

SFBs’ request for regulatory flexibility underscores the ongoing dialogue between financial institutions and regulatory bodies in adapting to evolving market conditions. The SFBs are seeking changes to the CD ratio calculation to better reflect their specific business models and operating environment.

Key Takeaways:

• Small finance banks in India are facing challenges with their credit-deposit ratio due to rapid loan growth and a focus on lending to underserved segments.
• SFBs are seeking a revision of the current CD ratio calculation norms to address liquidity concerns.
• The RBI is likely to consider the SFBs’ request, balancing the need for regulatory oversight with the need to support the growth of this emerging banking segment.

This development underscores the importance of regulatory adaptation and responsiveness to the unique needs of different segments within the financial sector.