The Hindu Business Line : Banks raising funds via CDs with MFs

Sources said that most of the CD placements with MFs originated from private sector banks. These CDs were placed at yields as high as 8.9 per cent for maturities up to a year. Shorter maturities of 180 days started at 7 per cent. CDs under the current Reserve Bank of India guidelines can be placed up to a maximum period of one year.

Though the cost of CDs appear to be high, PSU banks were also raising bulk deposits at rates over 8 per cent. Besides, even at such high costs, the funds were deployed in high yielding advances that generated spreads in excess of three per cent. Outstanding CDs are now estimated at a little over Rs 40,000 crore and about half of this was estimated to be for maturities over 180 days. Bankers said that despite the high rates offered, there was little cost on statutory ratios. This was especially in a regime where the banking sector had a surplus of SLR securities. The average holding of SLR securities among the banks was estimated to be about 29 per cent, against the mandated 25 per cent.

Private banks target MFs

The bankers said that the privates sector had targeted MFs for CD placements in view of the large accretions. Moreover, public sector corporates and insurance companies preferred parking their cash surpluses as bulk deposits with other PSU banks. PSU banks have opted to stay away from floating CDs. This was because CDs were liable for stamp duties, which in turn raised the cost of fund raising. Even growth funds were parking a small component of their accretions in CDs, sources said. In addition, some unit-linked schemes of the life insurance companies were also large investors in CDs.

MFs, the bankers said, mostly picked up the CDs for their balanced funds or their money market funds.

Sources said that the MFs had preferred the CDs in view of the liquidity and returns. CDs could be traded like debt instruments. Treasury bills also offered good liquidity, even though they offered much lower returns — only about 6 per cent for 364 days. Government securities for short maturities up to five years generated a maximum of 7.2 per cent with attendant risks of depreciation.

Bankers also said that funds were being raised in anticipation of a further round of liquidity tightening. This was in view of the high credit growth of close to 25 per cent and surge in government spending. Besides, oil companies were also large borrowers for funding their crude oil imports at the current high prices.

More Stories on : Mutual Funds | Short Term Instruments | Private Banks

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Banks raising funds via CDs with MFs

Parliamentary panel concerned over low sales growth of oil marketing cos

Govt targets 20,000 MW capacity this year

Infosys to invest big in training

MS readies for next anti-piracy drives

Hindalco hikes aluminium prices by Rs 10,000 per tonne

Long-term iron ore deal with China likely

Markets bounce back in style

Just a correction, says Chidambaram

Sugar stocks slip on fear of Govt intervention on pricing

Pvt airlines capture 75 pc market share