With reference to Banking Industry, high CD ratio of the banks would indicate:
1. higher ability of the banks to make optimal use of their resources
2. rise in interest rates
Select the correct option from the codes given below:
CD ratio is indicative of the percentage of funds lent by the bank out of the total amount raised through deposits. Higher ratio reflects ability of the bank to make optimal use of the available resources. It is the proportion of loan-assets created by banks from the deposits received. The higher the ratio, the higher the loan-assets created from deposits. A high credit-deposit ratio could lead to a rise in interest rates. For example suppose a bank has deposits worth Rs. 100 crores and a credit-deposit ratio of 60 per cent. That means Bank has used deposits worth Rs. 60 crores to create loan-assets. Only Rs. 40 crores is available for other investments. The other investments include investments in Government securities. If banks have less money left for investments in Government securities, the Government will have to take measures to increase raise money. Following this Government may either increase yield on these securities or may ask RBI to take measures. This tends to increase interest rates.
This question is a part of GKToday's Integrated IAS General Studies Module