Banks’ incremental credit-deposit ratio falls to 26% in FY17, from 89% a year ago
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Banks are sitting on huge amounts of deposits, with no avenues for lending. The upshot: a sea of liquidity. The excess liquidity has been invested, with the result that investments by banks grew by 22.17% in fiscal year 2017 (FY17), compared to 5.36% in FY16. This has driven down yields.
The chart shows the incremental credit-deposit ratio for banks over the past 10 years. Note the sharp drop in the ratio in FY17 to 26.01%, compared to 89.8% in FY16. The fall is due to demonetisation, which boosted deposit growth while reducing credit growth. This is the underlying reason for the sea of liquidity in the money markets.