Microfinance Practice: [MFP] Importance of monitoring credit to deposit ratio to understand how money is moving and why

Hi all,

I have been trying to understand and monitor the importance of ‘credit to deposit’ ratio in any banking system, to see the link between money movement and economy, and how that relates to microfinance. In India, these ratios are regularly published by the reserve bank of India, and tell us about urban bias for lending. Here is a brief summary of a analysis on RBI website. CD Ratio in Indian Banking System

I came across this recent article from US banking system, which is equally telling. Many years ago, when I was working in Zambia, it took me some time to understand why local banks were not keen to lend to local businesses and enterprises; because the government bonds offered very high secured returns for the capital that Banks placed with them.

This post of mine got triggered by another recent article that highlighted how Donor agencies have helped large banks in developing countries to design appropriate savings products for micro-savers, including use of mobile technology and agent network system. That sounds like a great news on itself. And yet, I could not help wonder, what does that do in terms of those very banks not investing that capital in the local economies at the community level and use that capital in urban areas? Does this create a dilemma for us, and a false dichotomy between savings and credit services?

Will look forward to get your thoughts and comments.

Thanks,

Anuj

Bank reserves and the falling loan to deposit ratio at US banks

By Sober Look on 20 January 2014

Earlier this week, CNN Money ran a story on JPMorgan’s quarterly results. Instead of focusing on the earnings, the author’s (Stephen Gandel) discussed the fact that JPMorgan’s loan-to-deposit ratio (LTD) hit a new low.

The nation’s largest banks are healthier than they have been in years. Someone, apparently, forgot to tell their loan officers.

JPMorgan Chase reported its 2013 profits on Tuesday. The news was mostly good — bottom line: $18 billion – but there was one significant black spot, not just for the bank, but for the economy in general. A key lending metric, the ratio of the bank’s loans-to-deposits, hit a new low.

In 2013, JPMorgan on average lent out just 57% of its deposits. That’s down from 61% a year ago and the lowest that ratio has been in at least a decade. Back in 2004, JPMorgan’s loan-to-deposit percentage was as high as 88%.

While JPMorgan’s LTD is particularly low, the bank is by no means unique. As discussed earlier (see post), LTD in the US is at the lows not seen in decades. On an absolute basis the gap between deposits and loans is now at some $2.4 trillion and growing. This divergence seems completely unique to the post-financial crisis environment.

Red = loans and leases, Blue = deposits (all commercial banks)

As the CNN story suggests, there are a few possible explanations for this trend. Here are four of them.

1. Demand for credit remains weak due to economic uncertainty, large amounts of cash on corporate balance sheets, jittery labor markets, poor wage growth expectations, general unease with taking on debt, etc.

2. Regulatory uncertainty and tighter (and to some extent unknown) capital requirements are preventing banks from extending more credit.

3. Exceptionally low rates make some forms of lending unprofitable.

4. Banks are running unusually large excess reserve positions with the Fed that are “crowding out” lending. These reserves are effectively “loans” to the Fed paying 25bp, funded with bank deposits that pay near zero, creating riskless profits with zero regulatory capital requirement.

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Anuj K. Jain

Sr. Coady Fellow| Microfinance and Development| COADY International Institute

St. Francis Xavier University, Antigonish, Nova Scotia, B2G 2W5| Ph: 902-872-0521