The Credit Deposit Ratio is an important indicator of the financial health of a bank. It indicates how much funds are being used for lending and vice-versa. A high credit to deposit ratio means that the bank relies more on deposits as opposed to other sources to generate funds for lending, which can be seen as a positive sign. On the other hand, if you’re Credit Deposit Ratio is lower than 1 it may mean that your business needs to focus on increasing its loan portfolio or risk going bankrupt in the near future!
The ratio, on the other hand, does not have a minimum or maximum limit. However, a low proportion indicates that banks are underutilizing their assets. A high ratio implies that there is a strain on resources if it is above a certain level.
The banking sectors credit-deposit ratio is currently 75%. A credit-deposit ratio of more than 70% indicates pressure on resources, as banks must set aside funds to maintain a cash reserve ratio of 4.5% and a statutory liquidity ratio of 23%. Banks may borrow from their capital; it is, however, not advised.
The deposit ratio is a measure of how much a bank lends in terms of its deposit base. The higher the deposit ratio percentage, the more likely banks are to make loans from their deposits. The deposit-to-loan ratio is the deposit liabilities of a bank divided by its loan assets.
In general, when deciding on funding sources for lending activities, it is best practice to use core funds over external borrowings whenever possible. In many circumstances this means that the deposit-to-lending activity should be aligned with at least 100%. This ensures maximum utilization and reduces potential cost associated with borrowing costs such as interest rates or fees charged by financial institutions.
Another use for deposit-to-loan ratio is in determining a bank’s capital adequacy, which consists of the amount of core funds held by the institution. A high deposit to lending activity means more money available to lend and vice versa.
However, there may be instances where using an alternative source of capital may give your business greater flexibility depending on its specific situation. If you have any concerns about credit risk management, speak to your financial adviser about the best approach for your business.
The over-extended ratio is a metric that indicates the health of a bank. A particularly high number is worrisome since it can imply pressure on resources as well as capital inadequacy concerns, forcing banks to increase more money. Furthermore, asset-liability mismatches would be detrimental to the balance sheet.
A low deposit to credit ratio is good for the overall health of a bank. It means that it’s able to use its own money more productively, with less risk and having covered itself against shocks like deposit runs or capital inadequacies.
However, such an occurrence is considered unique because there are few recorded instances of banks stretching themselves. However, the present ratio of banks has sparked concerns among the Reserve Bank because it might have systemic significance. Click here for more information on deposit pulsa.