A CD-Ratio Target That the Branch Pipeline Cannot Support
Brajesh is the branch manager of a semi-urban branch in Uttarakhand. As on 30 September his branch reports deposits of ₹48.00 crore and gross advances of ₹30.00 crore, a credit-deposit ratio of 62.5%. The regional office has fixed a CD ratio target of 68% for 31 March and expects deposits to grow 10% over the year, mostly in the January-March quarter. The branch's pipeline is limited: sanctioned but undisbursed limits of ₹4.20 crore, of which ₹2.40 crore is likely to be drawn before March; fresh sanctions of about ₹1.20 crore are in process; scheduled repayments of ₹1.50 crore and one expected prepayment of ₹0.60 crore will reduce the book. Lending rates on new advances average 9.25% per annum, and the regional office measures performance on both CD ratio and interest income. The manager must report a realistic number this week and cannot ask for more staff or a marketing budget.
1. Compute the year-end deposit figure and the advance book needed to hit 68%. How much growth in advances does that require, in rupees and as a percentage?
Read the worked answer
Step 1 - year-end deposits. 48.00 × 1.10 = ₹52.80 crore.
Step 2 - advances needed for 68%. Required advances = 0.68 × 52.80 = ₹35.904 crore.
Step 3 - absolute growth needed. 35.904 − 30.00 = ₹5.904 crore.
Step 4 - growth rate. 5.904 ÷ 30.00 = 0.1968 = 19.68% in six months, roughly 40% annualised.
Sanity check on the starting position: 30 ÷ 48 = 0.625, matching the stated 62.5%, so the base figures are consistent and the target arithmetic holds.
The number to remember is ₹5.9 crore of net new advances. Note that the requirement is driven by both numerator and denominator: because deposits are rising by ₹4.80 crore, merely holding advances at ₹30 crore would push the CD ratio down to 56.8% (30 ÷ 52.8). Standing still is a decline.
2. Using the stated pipeline, what CD ratio is actually achievable? Quantify the shortfall against target and state what you would put in the report to the regional office.
Read the worked answer
Achievable advance book at 31 March:
| Item | ₹ crore |
|---|---|
| Opening advances | 30.00 |
| Add: drawals from undisbursed limits | +2.40 |
| Add: fresh sanctions likely to be disbursed | +1.20 |
| Less: scheduled repayments | −1.50 |
| Less: expected prepayment | −0.60 |
| Closing advances | 31.50 |
Achievable CD ratio = 31.50 ÷ 52.80 = 59.66%.
Shortfall = 35.904 − 31.50 = ₹4.404 crore of advances.
What the report should say: report 59.7% as the realistic projection, show the ₹4.40 crore gap, and attach the pipeline breakup so the gap is auditable rather than an excuse. Then ask for one of two decisions in writing: (a) a sanctioned portfolio buy-out or takeover of about ₹4.4 crore, which closes the gap without new origination capacity, or (b) a formal revision of the target to 60% for this branch for the year.
Do not propose slowing deposit growth to flatter the ratio. Deposits are the branch's raw material and deposit mobilisation is separately measured; suppressing them to hit a ratio is self-defeating and would be read as such at the regional office.
3. If the target were met, the extra ₹4.404 crore would earn 9.25% per annum. What interest income is foregone in the January-March quarter, and how should that figure change the branch's negotiating position?
Read the worked answer
Calculation.
Annual interest on the shortfall = 4.404 × 0.0925 = ₹0.4074 crore. One quarter = 0.4074 × 3/12 = ₹0.1018 crore ≈ ₹10.18 lakh.
(Treat this as a ceiling, not a precise forecast - the ₹4.404 crore would not be outstanding for the full quarter even if sanctioned in January, so a realistic figure is perhaps half to two-thirds of ₹10.18 lakh.)
How to use it:
- It converts a compliance argument into a revenue argument, which is what gets a response from the regional office. 'We will miss the CD ratio by ₹4.4 crore' invites a reminder of the target; 'the gap costs roughly ₹10 lakh of quarterly interest income and here are the three ways to close it' invites a decision.
- It also prices the alternatives. A portfolio buy-out at a small spread sacrifice is clearly cheaper than forgoing ₹10 lakh a quarter, which strengthens the case for option (a).
- Keep the two objectives separate in the report: CD ratio is a stock measure at 31 March, interest income is a flow through the quarter. A December sanction that disburses in March fixes the ratio but adds almost nothing to income - worth flagging so the regional office does not expect both.