Who would not want a loan from the banks and that too if they come at low-interest rates. But hold on, do you realize, where do the banks get money from to give us loans? Actually, this is all our money which we deposit in the banks. Alarmed!!! Don’t be as there are many rules to be adhered to while taking loans. Let’s understand the same.
Credit means loans given out to borrowers by the banks. Credits are assets of the Bank. Deposits are the amount received from customers as deposits in the banks. Deposits are a liability to the bank. So; credit-deposit ratio broadly means the ratio of assets and liabilities of the banks. The credit-to-deposit (CTD) or loan-to-deposit ratio (LTD) is used for measuring a bank’s liquidity by dividing the bank’s total loans disbursed by the total deposits mobilized. It indicates how much of a bank’s core funds are being used for lending which is the main banking activity. CTD ratio helps in assessing a bank’s liquidity and indicates its financial health. A higher ratio indicates that the loans disbursed are more than the deposits and vice-versa.
If the ratio is too low, banks may not be earning as much as they should and it also indicates that banks are not mobilizing their resources fully. If the ratio is too high, it means that banks might not have enough liquidity to cover any unforeseen fund requirements, which may cause an asset-liability mismatch. A very high ratio is considered alarming because, in addition to indicating pressure on resources, it may also hint at capital adequacy issues, forcing banks to raise more capital. But such a situation is considered extreme, as there are not many known instances of banks overstretching themselves. Ideally LTD ratio is between 80% and 90% of deposits.
This ratio is a measure of banks financial health. When the interest rate environment improves, deposits grow at a slower pace than loans because higher interest rates push investors to invest more money, reducing the number of bank deposits they make. Conversely, when rates are lower, deposit growth increases. These changes affect the CTD ratio. But the Reserve Bank has voiced concerns over the current ratio of banks as it could have financial stability implication at the systemic level.
Credit to Deposit ratio (%) = Total Advances X 100
Suppose a Bank ABC has total advances of Rs. 40,00,000 crores and total deposits of Rs. 50,00,000 crores.
Credit to Deposits ratio (%) = 40,00,000 cr. X 100 = 80%
The Credit to Deposit ratio is 80%. This indicates that for every new Rs. 100 deposit Rs. 80 is being lent out.
With Stockedge app we don’t have to calculate Credit to Deposit ratio (%) on our own. It gives us the Credit to Deposit ratio of the last five years of any company listed in the stock exchange. We can look and compare Credit to Deposit ratio (%) of any company and filter out stocks accordingly.
Suppose we want to look at Credit to Deposit ratio of ICICI Bank Ltd.for last 5 years then in the Fundamental tab of ICICI Bank Ltd., click on the fundamentals tab, we will get Ratios tab. Then in the Ratios tab click on the Liquidity Ratios, we will get Credit to Deposits ratio (%) of ICICI Bank Ltd.
Credit to Deposit (%) of any bank is an important financial component to look at when analyzing a Bank. It tells us about liquidity position as well as the usage of funds by banks. It can be compared on time basis and with other banks to understand the trend of how banks are using their funds. With a click of a button, you can see the data of bank’s credit to deposit ratio (%) for five years. This is a free feature. So what are you waiting for, subscribe immediately to use this free feature. We also have paid feature scans based on Valuations. With the help of these ready-made scans you can with a click of a button filter out good companies. These scans are part of the premium offerings of StockEdge app.
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