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CD Ratio and Bank Profitability: An Empirical Study
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This paper examines the possible determinants and their effects on banking profitability as estimated by Net Interest Margin. Using secondary data from 2008-13, the study classifies banks operating in India under high CD ratio and low CD ratio. CD ratio represents the proportion of loan asset created from deposits. An Incremental Credit Deposit Ratio (ICDR) going beyond 100%, for a prolonged period, is a cause for concern to Central Bank, banking system, and other market participants as these are the first signs of pressure on resources and capital adequacy. Savers with the banking system are seeking alternate investment avenues for real positive returns. The study tries to analyse if the NIM, ICDR and Cost of Funds of banks with high and low CD ratio vary significantly. The results show that determinants of bank profitability have varied impact for banks under high CD ratio and low CD ratio categories.
Keywords
CD Ratio, Bank Profitability.
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