The Hindu Business Line : CD issuances by banks surge in 3 years

Fund record
Earlier, only nationalised banks and a few private banks were issuing CDs.
Market expect yields on CDs to fall to 7.75-8% if RBI decides to cut rates.
Used as handy tool for banks who do not want to lock in for a long period.

Shobha Kannan
Radhika Menon

Mumbai, Jan. 11 Certificate of Deposits issued by banks have vaulted over the past three years.

The total amount of outstanding Certificate of Deposits (CDs) issued by banks in November 2007 stood at Rs 1,25,635 crore, around 80 per cent higher than Rs 67,694 crore in November 2006. That in turn was 130 per cent higher than the Rs 29,345 crore level at which it stood in November 2005.

Market participants say that earlier only the nationalised banks and a few private banks were issuing CDs, but now many more banks are contributing to the increase in supply of CDs. They see its virtue in better balancing the maturity profile of their assets and liabilities

“CDs work well for asset-liability management because they cannot be closed prematurely. CDs which have a one year maturity are ideal for asset-liability management as term deposits of the same tenor are not readily available,” said Mr R.V.S. Sridhar, Senior Vice President-Treasury, Axis Bank.

Banks have been issuing CDs to manage liquidity, which has seesawed in 2007.

Getting dynamic

Mr Rajesh Mokashi, Executive Director, Care Ratings, said, “Banks are getting dynamic in issuing CDs as they are an important tool in their asset-liability management. It is basically a liquidity management tool and comes handy for banks who do not want to lock in for a long period.”

Banks prefer to lock their investments in short instruments now particularly since they think that interest rates have peaked out and they expect a cut in rates soon, said one senior bank official. The rate of interest on CDs had seen a low of 5.25-6.50 per cent in November 2005, and a high of 6.87-9 per cent in November 2007. Market participants, however, expect yields on CDs to fall to 7.75-8 per cent, if the RBI decides to cut rates.

The returns on a one-year CD are at 9 per cent, around the same as that of a retail deposit. However, mutual funds, which are the major investors in CDs, are finding this instrument to be more useful.

Use as alternative

Mr Ritesh Jain, Head-Fixed Income, Kotak Mahindra Asset Management, said that CDs were a good alternative investment to term deposits or commercial papers for their liquid funds.

“As per the SEBI diktat in April 2007, short-term deposits not exceeding 91 days cannot account for more than 15 per cent of a mutual fund’s net assets. Similarly, in comparison to commercial papers, Certificate of Deposits are more liquid and tradeable,” he said.

Mr N.S. Venkatesh, Managing Director and Chief Executive Officer, IDBI Gilts Ltd, added, “Mutual funds are increasingly investing in such instruments as they are negotiable instruments and do not have any mark-to-market issues.”

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