The Hindu Business Line : ING Vysya prices CDs above Bank Rate

Bankers said that the all-inclusive pricing, which include issue costs, work out to slightly above 6.2 per cent. This is now likely to become the benchmark for future CD issuers. ING Vysya mopped up upwards of Rs 800 crore from corporates and mutual funds (MFs).

Banking sources said that while the pricing of CDs by ING appeared aggressive, in reality it is very close to the fixed deposit price. This is particularly because unlike conventional demand and time liabilities, these are free from reserve ratio, statutory liquidity ratio and cash reserve ratio. They are normally issued for a maximum period of one year.

This is for the first time since April last year that CD issues were being priced at rates higher than the bank rate of 6 per cent. Earlier, these issues were priced at rates closer to the reverse repo rate though since August last year, the pricing has remained closer to the bank rate.

The sources said more banks are likely to adopt this kind of pricing strategy to garner the bulk deposits of corporates and MFs. In fact, several private and public sector banks are preparing to float CDs to mop up bulk deposits from both. This is particularly to mop up short-term surpluses with some of the mutual funds.

Bankers said the SEBI (Securities and Exchange Board of India) bar on MFs from parking funds in bank deposits provided an impetus for the CD market that has remained dormant for sometime. CDs are currently not covered by the SEBI directive to mutual funds.

Besides, corporates and MFs had lost interest in Treasury bills. During the last two years, both had remained as non-competitive bidders for either 91-day or 364-day Treasury bills. But they were increasingly becoming wary of the 91-day T-bills, in view of the escalating loss risks.

Mutual funds till April last year had booked large `other income' profits out of treasury operation, particularly in a regime of falling interest rates and when the yields of T-bills reigned below the then reverse repo rate of 4.5 per cent. However, with the interest rate situation reversing, funds, including some of the unit linked schemes of life insurance schemes had moved en masse to bank deposits for liquidity purposes.

Banking sources said that most of them parked these deposits only in 91-day T-bills or in the call markets, at very low spreads. Few banks were prepared to use the bulk deposits for funding credit, fearing asset liability mismatches. CDs allowed them to fund some of the credit growth of the banking sector.

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