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Priya Nair

Mumbai , July 18

PRIVATE and foreign banks are increasingly taking the certificates of deposit route to raise funds, as they find it cheaper than the savings and fixed deposits they garner.

According to the Reserve Bank of India's Weekly Statistical Supplement, there has been a gradual rise in the certificates of deposit issued by commercial banks.

The total amount outstanding increased from Rs 7,033 crore in the fortnight ended January 7, 2005 to Rs 18,503 crore for the fortnight ended June 10, 2005.

The annual interest rate range also increased from 3.91-6.26 per cent in January to 5.47-7.00 per cent in June.

Some of the larger issuers are UTI Bank, HSBC Bank, Standard Chartered Bank, and public sector banks such as UCO Bank and Allahabad Bank, said a banking analyst. "Banks that are desperate to grow their operations are the ones typically issuing these certificates."

Private and foreign banks do not have the huge branch network and retail customer base of public sector banks. The State-run banks prefer the demand deposits from retail customers for funds, as interest rates are lower on these.

But for a bank like UTI Bank, certificates of deposit costs are lower. Mr R.V.S. Sridhar, Vice-President (Treasury), UTI Bank, said: "The interest rate for a one-year certificate is six per cent, while that for a one-year term deposit is 6.5 per cent. We issue certificates of deposit if they could be raised at a better cost or if we feel the need for funds."

UTI Bank raised Rs 2,000 crore through this route in 2004-05 and approximately Rs 1,500 crore in 2003-04.

The outstanding issuances for the one-year certificate are between Rs 4,000 and Rs 5,000 crore today, Mr Sridhar said.

Another reason working in favour of these certificates is the captive market in the form of debt funds, which park their funds in these certificates since they are money market instruments. Mr Sridhar said: "It helps us access all kinds of markets."

The pricing of the certificates of deposit depends on the number of buyers, number of issuers, and supply-demand ratio. They work out cheaper even with additional stamp duty charged, as the stamp duty is very low, said Mr Sridhar.

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