Kerala banks grappling with high CD ratios; what next?

KOCHI: Kerala-based banks burdened with a high credit-deposit ratio (CD ratio) may find their going tough unless they succeed in attracting enough deposits.

Deposits have been a ‘holy grail’ for some time with growth in advances exceeding that of deposits by far, thus spiking the CD ratio to undesirably high levels.

In fact, most Kerala-based banks are found with their back against the wall as sourcing deposits has become an uphill task with the market turning fiercely competitive by the day.

To make matters further worse, there have been persistent complaints from different quarters that the Kerala-based banks have been using their state as a ‘deposit market’ with only less than half of their deposits being deployed for lending within Kerala.

Deposit market

RBI has repeatedly warned these banks, especially CSB Bank, against this trend urging them to improve the quantum of lending within the state.

A top official from a Thrissur-based bank informed businessbenchmark.news that the Reserve Bank of India (RBI) has already conveyed its concern to selected banks about crossing the 80 per cent CD ratio.

According to analysts, a significant amount of money is now flowing into equity markets in the form of subscriptions to mutual funds (MFs), particularly via the systematic investment plan (SIP) route.

These investments are offering better returns than the traditional deposits, giving, of late, the banks a run for their money.

RBI unhappy?

The RBI Governor Shakitkanta Das, at the recent Financial Express BFSI Summit, said that banks’ credit growth should not run miles ahead of deposit.

“Deposit mobilisation has been lagging credit growth for some time now. This may potentially expose the system to structural liquidity issues,” Das warned.

A discussion about high CD ratio in the country’s banking system may have been triggered by a surge in the CD ratio of HDFC Bank after HDFC Ltd got merged with it last year.

HDFC Bank’s CD ratio thereon has reached a ‘precarious’ 104 per cent as of June end, 2024, which is considered alarming by any standard within the banking fraternity.

CD ratio

Barring the Thrissur-headquartered Dhanlaxmi Bank, the smallest among the lot, all Kerala-based banks have their credit-deposit ratio (CD ratio) having already crossed or at 80 per cent, which is perceived as high in the current context.

(CD ratio means the credit-deposit ratio and an 80 per cent CD ratio means the bank has already lent 80 per cent of its customer deposits)

Federal Bank, the largest Kerala-based bank sits on a high CD ratio of 88.90 per cent as of June end, 2024. The CD ratios of other banks are as follow: South Indian Bank (79.69 per cent); CSB Bank (83.89 per cent); ESAF Small Finance Bank (89.92 per cent) and Dhanlaxmi Bank (73.71 per cent).

The unpleasant truth is that banks need to essentially improve (reduce) CD ratio in order for them to continue with their lending business and the only way before them is to attract deposits which has become elusive now.

Rate war

A rate war is in the offing as banks have set out in search of deposits by any means, sending the deposit rates to new highs.

“Larger banks such as State Bank of India (SBI) and HDFC Bank have strong presence in Kerala, which is being viewed as an ideal deposit market, and this acts as a deterrent to our efforts to raise deposits from within the state, being a smaller player compared with them,” credit head of a Kerala-based bank bemoaned while interacting with businessbenchmark.news.

Kerala banks will be required to grid up their loins to build up deposits in a market, where SBI has 1183 branches and Rs2.27 lakh crore deposit base. HDFC Bank already runs 377 branches in the state with a deposit base of Rs44,420 crore.

There have been unconfirmed reports that HDFC Bank is planning to open a further 200 branches in Kerala as it will certainly leave no stone unturned in its efforts to prune its high CD ratio by accumulating more deposits.

Efforts on

HDFC Bank MD & CEO, Sashidhar Jagdishan, has said in a recent analysts call following the announcement of quarterly results (end-June) that his bank is aiming to lower its credit-deposit (CD) ratio from 104 per cent as quickly as possible.

 “We have not received any regulatory prescription (from RBI), but the thought process is that we will try and get this done (lower CD ratio) as quickly as possible,” he added.

HDFC Bank has also pursued the route of selling its loan portfolio which can also effectively reduce its CD ratio. Chief Financial Officer (CFO) of the bank, Srinivasan Vaidyanathan, said in a post-earnings media call a few days ago that HDFC Bank sold a Rs5,000 crore loan portfolio to an undisclosed buyer in June.

A recent report said IDFC First Bank also sold a basket of unsecured retail loans worth Rs600 crore-Rs700 crore to Citigroup Inc. in a securitisation deal at the beginning of the year. All these efforts are said to be aimed at bringing down thier CD ratio to a healthy level.