Karnataka’s loan-to-deposit ratio declining, but stable: RBI study

Loans disbursed by Karnataka banks as a percentage of their deposits saw the “steepest drop” among nine states during the pandemic, according to a Reserve Bank of India study commissioned by the administration led by BS Yediyurappa.

This means that banks are lending less, which is bad news for the government pushing them to extend more credit, especially in the agriculture and housing sectors.

The study found that Karnataka experienced a drop in the credit-to-deposit ratio of 5.13 percentage points in FY2020-21 compared to 2019-20, the largest drop among Kerala, Tamil Nadu, Andhra Pradesh, Telangana, Madhya Pradesh, Rajasthan, Gujarat and Maharashtra.

The CD ratio shows how much a bank is lending on its deposits or how much of its core funds are used for loans. A drop in the CD ratio may indicate excess liquidity due to higher deposits and lack of demand for credit or loans.

Read more: The second wave of the Covid-19 surprised us, India was not ready: the Minister of Finance Nirmala Sitharaman

The state government is concerned that Karnataka’s CD ratio has fallen from 77.08% in June 2019 to 71.92% in September 2020. It is this trend that has prompted the government to bring in the Department of financial inclusion and development of the RBI to undertake a study on the CD ratio of Karnataka.

The change in Bengaluru Urban, which accounts for three-fifths of Karnataka’s banking activity, has had an impact on the CD ratio. The CD ratio in the capital district increased from 79.69% in June 2019 to 71.66% in September 2020.

One of the main reasons for Bengaluru Urban’s low CD ratio, as confirmed by the big banks, is that the IT / IT services sector financed by equity is reducing the dependence on bank credit as well as significant inflows under form of foreign investment, which is reflected in the large base of deposits in the district, ”the study said.

“Additionally, a high percentage of bulk deposits from government departments in Bengaluru Urban, a high percentage of HNI clients and retirees also contribute to a disproportionately high deposit base in the state.”

Lower CD ratio levels for longer periods could indicate “business considerations, as rising NPAs lead to tighter lending standards.” It could also indicate a growing dependence on the informal / non-bank sector for fundraising, ”the study says.

There is some consolation, however. The CD ratio over the past 10 years has been the most stable in Karnataka.

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