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Bihar's Banking Sector Grapples With Low Credit-Deposit Ratio
The very function of banks hinges on their ability to gather funds from the public and channel them into loans for economic activity. This lending activity, measured against deposits, is known as the Credit-Deposit Ratio (CDR). While a CDR between 70-80% is generally seen as healthy, Bihar's banking landscape presents a concerning picture with a significantly lower CDR.
The Core Issue: A Low CDR in Bihar
According to Bihar's Economic Survey 2024-25, the state's CDR stood at a mere 52.8% in 2024. This places Bihar among states like Jharkhand (38.9%), Odisha (51%), and West Bengal (52.6%) with the lowest ratios. This low ratio suggests that a substantial portion of deposits mobilized within Bihar are not being lent out locally, potentially hindering economic growth.
Disparities Within the Banking System
The situation is further complicated by a stark contrast between public sector banks and private sector banks. Nationally, private banks have a CDR of 104.2%, indicating they lend more than their deposit base, often relying on other funding sources. In contrast, public sector banks have a CDR of 56.3%. Within Bihar, this gap is even more pronounced. Public sector banks, which manage three-fourths of all deposits in the state, account for only 59% of advances. Conversely, private sector banks, handling just 15% of deposits, are responsible for 28% of advances. This imbalance, where public banks underutilize funds and private banks may be over-leveraged, is detrimental to overall financial stability.
Financial Implications and Risks
A persistently low CDR can signal underutilization of financial resources, potentially leading to a slower pace of credit growth and economic development. For banks, an overly high CDR, as seen in some private banks, can increase liquidity and credit risks if their lending is not adequately backed by stable, deposit-based funding. The article notes that in January 2024, the Reserve Bank of India (RBI) had previously voiced concerns about a select category of banks, particularly Small Finance Banks, whose CDRs exceeded 100%.
Historical Trends and Contributing Factors
The gap between the CDR of public and private banks in Bihar has been widening since 2016. While private banks have steadily increased their CDR, public sector banks have seen only a gentle rise. This trend, coupled with Bihar's high Non-Performing Assets (NPAs) of 7.5%—significantly higher than the national average of 2.8%—especially in rural areas (21.35%) and the agricultural sector (16.40%), may be hindering public banks' willingness or ability to disburse credit.
Policy Suggestions for Improvement
To address the sluggishness in Bihar's CDR, several policy interventions are suggested. A significant push is needed for public sector banks to increase credit disbursement, potentially spurred by government infrastructure investment. Public banks could also adopt best practices from private banks to manage their balance sheets and reduce NPAs. Strengthening banking correspondents, like Jeevika Didis, could improve loan monitoring and reduce default rates, thereby fostering credit growth.
Impact
This news highlights potential systemic risks within a major regional banking sector and points to operational inefficiencies in public sector banks. It could lead to increased scrutiny from the Reserve Bank of India and prompt policy changes aimed at improving credit flow and financial stability in Bihar. For investors, it underscores the importance of regional banking health and the performance disparities between public and private banking institutions. The situation in Bihar, while specific, reflects broader challenges in financial inclusion and credit deployment across various Indian states. The stability of the banking sector is crucial for overall economic health.
Impact Rating: 7/10
Difficult Terms Explained
Credit-Deposit Ratio (CDR): A banking metric that compares the total loans (credit) a bank has disbursed to the total deposits it has gathered from customers. A ratio between 70-80% is generally considered healthy.
Non-Performing Assets (NPAs): Loans on which the borrower has stopped making principal or interest payments for a specified period (typically 90 days). High NPAs indicate poor loan quality and can strain a bank's profitability and stability.
Liquidity Risk: The risk that a bank may not have enough cash or easily convertible assets to meet its short-term obligations, such as deposit withdrawals.
Credit Risk: The risk of loss resulting from a borrower's failure to repay a loan or meet contractual obligations.
Banking Correspondents: Individuals or entities appointed by banks to provide banking services in areas where setting up a full-fledged branch is not economically viable. They help in financial inclusion.