With the collapse of a rather innocuous Punjab and Maharashtra Co-operative Bank, there is unease among bank depositors. While mainstream Indian banks have never been allowed to collapse as against co-operative banks, it is a fact that these lenders face challenges of deploying deposits into reasonably safe asset through lending.

Many a times banks have slipped up in their decisions to lend and the huge stockpile of bad loans is a proof. Amid this persistent problem of bad assets and the unease after the cooperative bank’s collapse, it is a good time to take stock of where public deposits lay right now. After all, deposits don’t sleep in the vaults of banks but are lent away to entrepreneurs, businessmen and even to individuals. Since some safety is required, banks invest a certain portion of deposits into government securities.

The credit-to-deposit ratio gives a fair idea as to how much of deposits have been given as loans. This ratio stood at 75.74% as of 11 October. Simply put, of every 100 worth of deposit, 75.74 has been given as a loan and the rest put into government bonds. Just six months ago, a slightly higher 77 was given as loans. This is as per the stock of deposits on the given day.

How many of these loans are safe and how many are stressed? According to Reserve Bank of India’s monetary policy report, stressed assets as a percentage of total loans of banks has risen and was almost 10% in June. Assuming no dramatic change since then, 7.6 of deposits are basically bad asset on banks’ books. Essentially, out of 100 deposit, a little over 7 doesn’t earn any return owing to bad investment.

Having learnt their lessons, banks have been rather cautious in lending which explains why they didn’t lend at all in the six months ending September. Indeed, the flow of funds to the economy from banks shrank during this period. Ergo, the incremental credit-to-deposit ratio suggests that banks parked almost all of the deposits they got between April and September into government bonds.

That said, banks continue to pay for their past mistakes in lending and have to keep aside provisions towards bad loans. That affects their interest income as bad loans pay no interest and have to be provided for. As interest income becomes a challenge, banks avoid reducing interest rates on loans. This explains why loan rates haven’t come down fast.

Bank deposits are still the most safe and liquid form of asset for the public. In that, banks as a custodian of public money need to be careful where they lend them.