Credit-Deposit Ratio: Dip in credit-deposit ratio lowers cost of borrowing for CP, CD

Reserve Bank of India (RBI) data show that interest rates for CPs stood at 7.43% in December 2024 (up to December 19), lower than 7.89% during the corresponding period of the previous year. Likewise, the rates on CDs softened to 7.36% (up to December 19), from 7.52% a year ago, as the gap between credit and deposit growth narrowed.

“While the seasonally tight banking system liquidity is a major deterrent for the money market, the improved outlook on rates is supportive for the overall rate market,” Soumyajit Niyogi, director, core analytical group at India Ratings said in a note. “Overall, CP issuances by both corporates and NBFCs are likely to remain healthy, though the credit premium for low-rated entities is expected to show an upward bias.”

Agencies

CP issuances stood at ₹9.85 lakh crore during 2024-25 (up to November), higher than ₹8.85 lakh crore in the corresponding period of the previous year while CD issuances grew by 68% to ₹6.88 lakh crore during the April-November period, significantly higher than ₹4.09 lakh crore in the corresponding period of the previous year, reflecting banks and non-bank funding requirements.

With the RBI increasing the risk weight on bank loans to NBFCs in November 2023, these entities have been relying on alternative market instruments to mobilise resources.

“The sustained high levels of CD issuance reflects the challenges that banks are facing in mobilising adequate quantum of retail deposits to fund business growth,” Nitin Aggarwal, Head BFSI, Motilal Oswal Securities said in a note. “This trend highlights banks’ strategic focus on expanding their loan portfolios, even at the expense of higher funding costs and narrower margins.”