IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563

Vol.6, No.4, July-August 2016

Performance of Banking through Credit Deposit Ratio

in Public Sector Banks in India
Omid Sharifi1, PhD Scholar, Department of Business
Administration, Faculty of Management and Research
Studies, Aligarh Muslim University, Aligarh, U.P., India
Abstract Banks play an important role in the mobilization and
allocation of resources in an economy. Deposits and Credits are
inflow and outflow, respectively, of funds of the banks. The credit
deposit ratio is a barometer of progress of a financial institution
like commercial banks. It indicates the level credit deployment of
banks in relation to deposits mobilized by them. A high credit
deposit ratio indicates that banks are generating more credit from
its deposits and vice-versa. The outcome of this ratio reflects the
ability of the bank to make optimal use of the available resources.
The study has carried out with a purpose to present the
performance of public sector banks through the credit-deposit
ratio for this purpose secondary data collected from 26 public
sector banks for a 7 year period (2008-2015) were collected from
annual reports of respective banks and Reserve Bank of India.
The data were analyzed using a descriptive statics and panel data
regression model. The findings and analysis reveal that the CDR
impact positively on public sector bank's financial performance in
the period under study.
Keywords: Credit-Deposit Ratio; Profitability; Public Sector Banks;
Return on Assets; Return on Equity; Net Interest Margin

I.

INTRODUCTION

Banks are germane to economic development through the

financial services provided by them. The efficient and
effective performance of the banking industry over time is an
index of financial stability. Banks play an important role in the
mobilization and allocation of resources in an economy. The
sound financial position of a bank is the guarantee not only to
its depositors but equally important for the whole economy of
the nation [1]. Deposits and Credits are inflow and outflow,
respectively, of funds of the banks. Bank credit (in the form of
loans and advances) has a dynamic role to play in the regions
and sectors, such as self-employed production units, small
farmers and small-scale enterprises, as their growth and
survival depends on external finance. The credit is deployed
by commercial banks based on the deposits mobilised from the
public after making allowances for statutory requirements
prescribed by RBI from time to-time. Sustained efforts have
been made by commercial banks to induce people to keep a
part of their savings as bank deposits. Deposits mobilised by
the banks are utilised for: (i) loans and advances, (ii)
investments in government and other approved securities in
fulfillment of the liquidity stipulations, and (iii) investment in
commercial papers, shares, debentures, etc. up to a stipulated
ceiling. Commercial Banks enjoys a special privilege of credit
creation by multiple expansions of deposits. In order to

Javaid Akhter2, Professor, Department of Business

Administration, Faculty of Management and Research
Studies, Aligarh Muslim University, Aligarh, U.P., India
optimise credit flow and to ensure higher efficiency of credit
creation, a monetary tool, called Credit-Deposit (C-D) ratio
was introduced by RBI. The tool is also sometimes referred to
as Loan-to-Deposit ratio, as it reflects total advances as a
proportion of total deposits and thus measures the spread
between outflow and inflow (thereby indicating efficiency of
credit creation). Credit-Deposit ratio of Commercial Banks has
many-folds significance. Primarily, it is a measure of the
utilization of resources by the banking system. the ratio is an
important tool of monetary management; magnitude of the
ratio shows managements aggressiveness to improve income
by higher lending operations. In a way, performance of
banking industry may be gauged through value of the ratio,
since it reflects as to how the funds are utilized by the banks to
generate their revenue and increase the market share. In fact,
the actual or possible level of C-D ratio might be one of the
significant factors which the Reserve Bank of India could take
into account in formulating measures of general credit control.
Credit-Deposit ratio is proportion of loan created by banks
from deposits it receives, in other words its capacity of banks
to lend. High ratio indicates banks are generating more credit
from its deposits and vice-versa. The outcome of this ratio
reflects the ability of the bank to make optimal use of the
available resources.
II.

Literature Review

The impact of C-D ratio on bank profitability is not a

widely studied topic. However some of the relevant studies on
financial performance of banks as well as C-D ratio and its
implications are discussed in this section.
Verma, P., & Kumar, N. (2007), conducted study on A
study of credit deposit ratio in selected states of western India
The main objective of this study was to analyze the
performance of C-D ratio of scheduled commercial banks of
three major states of the western part of India i.e. Rajasthan,
Gujarat and Maharashtra, and India as a whole. The findings
of the study showed that the Maharashtra which is the
backbone of growth and progress of Indian economy has been
more volatile but performing well in terms of C-D ratio
whereas Rajasthan and Gujarat are stable at lower level [2]. In
another research, Kumar, N., & Verma, P. (2008), conducted
study on Credit deposit ratio and ownership structure in the
Indian banking sector-an empirical analysis this study
attempted to study whether some bank groups, based on
ownership, are better at delivering credit in an efficient

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IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563
Vol.6, No.4, July-August 2016

manner. They used econometric techniques over the time

horizon of 1991 to 2006 and found that the foreign and private
bank groups exhibited the better C-D ratio, whereas public
sector banks were found to need some attention and further
scope of improvement exists. They concluded with the
findings as follows. Public sector banks are spread all over
India with highest asset, credit and deposit, whereas foreign
banks with comparatively fewer offices are contributing a
good share of credit and deposit in the Indian economy. The
private banks lie in between foreign and public sector banks in
term of C-D ratio [3].
Similarly, Kaur, R. (2012), conducted study on
Performance evaluation of Indian banking system: A
comparative study of public sector and private sector banks.
In this study author attempted for comparative of public
sector and private sector banks .The time period of study was
from 2009-2011. The study found that the overall performance
of public sector banks was better than private sector banks
over the period of study. The performance evaluation had
many parameters like growth in C-D ratio, net worth, deposits,
advances, total assets etc [4]. Singh, A. B., & Tandon, P.
(2012), examined the financial performance of SBI and ICICI
Bank, public sector and private sector respectively. The data
used for the study was entirely secondary in nature. This
study found that SBI was performing well and financially
sound than ICICI Bank but in context of deposits and
expenditure ICICI bank has better managing efficiency than
SBI. The mean of Credit Deposit Ratio in ICICI was higher
(89.302 %) than in SBI (76.184%). This shows that ICICI
Bank has created more loan assets from its deposits as
compared to SBI [5].
III.

RESEARCH PROBLEM AND OBJECTIVES

IV.

HYPOTHESIS

: There is no significant impact of CDR on ROA of

Indian public sector banks.
: There is no significant impact of CDR on ROE of
Indian public sector banks.
: There is no significant impact of CDR on NIM of Indian
public sector banks.
V.

DATA AND RESEARCH METHODOLOGY

The study has been conducted with reference to the data

related to Public Sector Banks (SBI and Nationalized Banks)
operating in India. This study is based on the secondary data.
The data required for this study were collected from the
various sources like monthly RBI bulletins, published by RBI,
Govt. of India, Reports published by National Institute of
Bank Management, Annual reports of various banks,
publications and notifications of RBI for the period of 2009
2015. The data were analyzed using descriptive statistics;
simple regression model and correlation by using SPSS
software version 20 and the Return on Assets (ROA), Return
on equity (ROE) and Net Interest Margin (NIM) were used as
financial performance variables and Credit Deposit variable as
independent variable.
VI.

VARIABLES STATISTICS OF THE PSBS IN INDIA

A. Return on Assets: ROA is a profitability ratio and shows

how profitable a bank is relative to its total assets. ROA also
gives an idea as to how efficient management is at using its
assets to generate earnings.
TABLE 1 RETURN ON ASSETS OF THE PSBS IN INDIA (2008-2015)

Banks are germane to economic development through the

financial services provided by them. The efficient and
effective performance of the banking industry over time is an
index of financial stability. Banks play an important role in the
mobilization and allocation of resources in an economy. The
sound financial position of a bank is the guarantee not only to
its depositors but equally important for the whole economy of
the nation. Deposits and Credits are inflow and outflow,
respectively, of funds of the banks. In order to optimise credit
flow and to ensure higher efficiency of credit creation, a
monetary tool, called Credit-Deposit (C-D) ratio was
introduced by RBI. Credit-Deposit ratio is proportion of loan
created by banks from deposits it receives, in other words its
capacity of banks to lend. High ratio indicates banks are
generating more credit from its deposits and vice-versa. The
outcome of this ratio reflects the ability of the bank to make
optimal use of the available resources. The purpose of this
study is to examine the impact of Credit-Deposit ratio on the
profitability of public sector banks for the period of 2009 to
2015.
Source: RBI Reports RBI Annual Report, A Profile of Banks, 2014- 15.

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IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563
Vol.6, No.4, July-August 2016

B. Return on Equity: ROE is a key profitability ratio that

investors use to measure of the amount of a company's income
that is returned as shareholder equity. Table 2 shows the ROE
of all PSBs in India (2008-15).
TABLE 2 RETURN ON EQUITY OF THE PSBS IN INDIA (2008-2015)

D. Credit to Deposit: The ratio of credit to deposit is the most

commonly used measure of bank credit risk. The ratio can also
indicate how far the bank used depositors fund on credit
activity which is prone to default risk. A high credit-deposit
ratio indicates that larger portion of deposits is put to use to
earn maximum interests. Table 4 shows the CDR of all PSBs
in India (2008-15).
TABLE 4 CREDIT-DEPOSIT RATIO OF THE PSBS IN INDIA (2008-2015)

Source: RBI Reports RBI Annual Report, A Profile of Banks, 2014- 15.

C. Net Interest Margin: Table 3 shows the NIM of all PSBs in

India (2008-15).
Table 3 Net Interest Margin of the PSBs in India (2008-2015)
Source: RBI Reports RBI Annual Report, A Profile of Banks, 2014- 15.

VII. DESCRIPTION OF THE VARIABLES FOR PSBS

To provide a clear picture of financial performance and
credit-deposit ratio considered under study the descriptive
statics, namely: mean, standard deviation, mean and maximum
values computed for the sample observation of 26 Public
Sector Banks in India for a 7 years period are summarized in
Table 5.
Table 5 Descriptive Statistics of the variables for PSBs
N Minimum Maximum Mean Std. Deviation
ROA

182

-.16

1.67

.7777

.33892

ROE

182

-21.73

30.64

13.6405

6.74515

NIM

182

.82

3.62

2.4538

.47287

CD

182

58.98

92.03

74.3902

5.57415

Valid N (listwise) 182

Source: The researcher computation through SPSS.
Source: RBI Reports RBI Annual Report, A Profile of Banks, 2014- 15.

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IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563
Vol.6, No.4, July-August 2016

VIII. CORRELATION ANALYSIS FOR PSBS.

ROA = 0.719 + 0.001 CDR

Correlation analysis measures the relationship between two

items. The resulting value (called the "correlation coefficient")
shows if changes in one item will result in changes in the other
item (e.g., the security's price). Correlation is a way to index
the degree to which two or more variables are associated with
or related to each other. The table 6 shows that CDR is
positively correlated with ROA, ROE and NIM .

From the table 7, the beta coefficients to be used in this

study are the unstandardized coefficients. The results indicate
that a unit change in the CDR causes an increase of 0.001 unit
changes in the ROA. This indicates that CDR has a positive
influence on ROA. The result shows that for the independent
variable CDR, the probability of the t statistic (0.174) for the b
coefficient is 0.862 which is greater than the level of
significance of 0.05. We accept the null hypothesis that there
is no a significant impact of CDR on ROA.

Table 6 Correlation Matrix among Dependent and Independent

Variables of the PSBs
ROA
ROA

Pearson Correlation

Sig. (1-tailed)
ROE

NIM

CD

ROE
.867

**

.000

NIM
.498

CD

**

.013

.000

182

182

182

182

.867**

.372**

.019

Sig. (1-tailed)

.000

.000

.401

182

182

182

.242**

Pearson Correlation

.498** .372**

Unstandardized
Coefficients

.431

Pearson Correlation

182

Table 7 Regression Coefficients of the PSBs of India (Dependent Variable:

ROA)

Sig. (1-tailed)

.000

.000

.001

182

182

182

182

Pearson Correlation

.013

.019

.242**

Sig. (1-tailed)

.431

.401

.001

182

182

182

182

**. Correlation is significant at the 0.01 level (1-tailed).

Model

Std. Error

1 (Constant)

.719

.338

.001

.005

CD

Standardized
Coefficients
Beta

Sig.

2.128 .035
.013

.174 .862

a. Dependent Variable: ROA

Source: the researcher computation through SPSS

B. Hypothesis 2
: There is no significant impact of CDR on ROE of Indian
public sector banks.
Simple Linear Regression

*. Correlation is significant at the 0.05 level (1-tailed).

Source: The researcher computation through SPSS.

IX.

ROE = 11.958 + 0.023 CDR

THE REGRESSION MODEL

The regression model is specified below and the following

symbols were used to identify the respective variables. The
general model is as follows
Y= +X+
Where
Y = Financial performance (ROA, ROE and NIM)
1 X1 = Credit-Deposit Ratio (CDR)
= Intercept
= Error term
X.

From the table 8 the regression equation is

HYPOTHESES TESTING

A. Hypothesis 1
: There is no significant impact of CDR on ROA of Indian
public sector banks.
Simple Linear Regression
Regression analysis is a commonly applied data analysis
technique for measuring the linear relationships between 2 or
more variables (Hair et al., 2003). From the table 7 the
regression equation is

From the table 8, the results indicate that a unit change in

the CDR causes an increase of 0.023 unit changes in the ROE.
This indicates that CDR has a positive influence on ROE. The
result shows that for the independent variable CDR, the
probability of the t statistic (0.251) for the b coefficient is
0.802 which is greater than the level of significance of 0.05.
We accept the null hypothesis that there is no a significant
impact of CDR on ROE.
Table 8 Regression Coefficients of the PSBs of India (Dependent Variable:
ROE)
Unstandardized
Coefficients
Model

Std. Error

1 (Constant)

11.958

6.727

.023

.090

CD

Standardized
Coefficients
Beta

Sig.

1.778 .077
.019

.251 .802

a. Dependent Variable: ROE

C. Hypothesis 3
: There is no significant impact of CDR on NIM of Indian
public sector banks.
Simple Linear Regression

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IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563
Vol.6, No.4, July-August 2016

From the table 9 the regression equation is

NIM = 0.930 + 0.020 CDR
From the table 9, the results indicate that a unit change in
the CDR causes an increase of 0.023 unit changes in the ROE.
This indicates that CDR has a positive influence on NIM. The
result shows that for the independent variable CDR, the
probability of the t statistic (3.339) for the b coefficient is
0.001 which is less than the level of significance of 0.05. We
reject the null hypothesis that there is no a significant impact
of CDR on ROE.
Table 9 Regression Coefficients of the PSBs of India (Dependent Variable:
NIM)
Unstandardized
Coefficients

Standardized
Coefficients

Model

Std. Error

1 (Constant)

.930

.458

.020

.006

CD

Beta

Sig.

2.031 .044
.242

3.339 .001

a. Dependent Variable: NIM

Table 10 Result summary of research hypotheses test
All PSBs
There is no significant impact of CDR on ROA Accepted
There is no significant impact of CDR on ROE Accepted
There is no significant impact of CDR on NIM

Rejected

Source: research findings

XI.

CONCLUSION

From the correlation coefficients table, it can be seen, that a

positive correlation exist between the independent variable
CDR and dependent variables (ROA, ROE and NIM). The
results indicate that a unit change in CDR leads to a positive
change of 0.001 (0.1%), 0.023 (2.3%) and 0.020 (2.0%)
changes in the financial performance indicators (ROA, ROE
and NIM). This indicates that the CDR impact positively on
public sector bank's financial performance in the period under
study. This is in agreement with Rengasamy, (2014) who
attempt to evaluate the impact of CDR on ROA for locally
owned commercial banks in Malaysia for the period of five
years from 2009 to 2013 [6]. Observation of t-test for the
independent variable CDR and dependent variables ROA and
ROE shows that the probability of the t statistic (0.174, 0.251)
for the b coefficient are 0.862, 0.802 which are greater than
the level of significance of 0.05 and statistically no significant.
So, we accept the null hypothesis and conclude that there is no
significant impact of independent variables (CDR) on
dependent variables (ROA and ROE). While Observation of ttest for the independent variable CDR and dependent variable
NIM shows that the probability of the t statistic (3.339) for the
b coefficient is 0.001 which is less than the level of
significance of 0.05 and statistically significant. So, we reject
the null hypothesis and conclude that there is significant
impact of independent variables (CDR) on dependent
variables NIM. The positive impact of Credit-Deposit on

bank's financial performance shows that the bank charge more

than what the bank incurring as interest expense for the
depositors and the more loan the bank give will have a
significant effect on banks profitability. The CDR of the
Public Sector Banks is lower than 1 and it has been increasing
regularly year by year.
REFERENCES
[1] Ibrahim, M. (2011). Operational Performance of Indian
Scheduled Commercial Banks-An Analysis. International
Journal of Business and Management, 6(5), 120-128.
[2] Verma, P., & Kumar, N. (2007). A study of credit deposit
ratio in selected states of western India. The ICFAI Journal of
Bank Management, 6(4).
[3] Kumar, N., & Verma, P. (2008). Credit deposit ratio and
ownership structure in the Indian banking sector: an empirical
analysis. Global Academic Society Journal: Social Science
Insight, 1(4), 4-17.
[4] Kaur, R. (2012). Performance evaluation of Indian banking
system: A comparative study of public sector and private
sector banks. South Asian Academic Research Journals, 2(1).
[5] Singh, A. B., & Tandon, P. (2012). A study of financial
performance: A comparative analysis of SBI and ICICI Bank.
International Journal of Marketing, Financial Services &
Management Research, 1(11).
[6] Rengasamy, D. (2014). Impact of Loan Deposit Ratio
(LDR) on Profitability: Panel Evidence from Commercial
Banks in Malaysia. Proceedings of the Third International
Conference on Global Business, Economics, Finance and
Social Sciences (GB14Mumbai Conference) Mumbai, India.

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