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C. Shivkumar

Bangalore, Sept. 12 Faced with the Finance Ministry’s disapproval of bulk deposits, public sector banks (PSB) have returned to the floating certificates of deposits (CDs).

At least Rs 6,500 crore of Certificates of deposits were floated by PSBs during the last fortnight.

The present RBI guidelines allow banks to float certificates of deposits up to one year maturity at market-driven rates.

The floats, top bankers said, were done to raise resources to meet the rising credit demand from the farm and industrial sectors.

Bankers said that the switch over to certificates of deposits as a source of funds was in view the Finance Minister’s censure of PSBs resorting to bulk deposits. Large corporates, both public and private sector, till March this year resorted to inviting bids from banks for parking cash surpluses. The deposits were placed with the highest bidders.

The Finance Ministry’s censure has led banks to replacing bulk deposits with certificates of deposits. The difference is that certificates of deposits are placed with bidders quoting the lowest interest rates.

Even these rates are in excess of 11 per cent, bankers said. For instance, Canara Bank’s 12-month CD was placed at 11.32 per cent while Jammu and Kashmir Bank’s CD was placed at 11.80 per cent.

The rates currently offered are at least 100 basis points over the maximum deposit rates on offer by the banks.

The maximum deposit rates on offer by PSBs for retail deposits are about 10.5 per cent. Inclusive of costs for reserve ratios, both the Cash Reserve Ratio and the Statutory Liquidity Ratio, the effective costs of such resources are closer to about 12 per cent.

Among the entities investing in bank certificates of deposits are insurance companies and mutual funds. Insurers and funds parked their investible funds in Certificates of deposits to maximise the average yield on investments.

Life insurers, including Life Insurance Corporation and private sector life insurers, parked part of their Government securities coupon flows inCertificates of deposits, the bankers said.

Bankers said that raising short-term CD funds also helped them take advantage of arbitrage opportunities arising from the sliding yields of Government securities. The banks parked some of the resources in T-bills and Government securities.

Mr S. Srinivasa Raghavan, Vice-President and Treasury Head, IDBI Gilts Ltd, said “some of the resources are also used to fund corporate credit.” Banks anticipated refinancing the high cost CD resources with current and saving deposits.

Bankers said refineries are prepared to pay up to 12.5 to 13 per cent on short-term credit for meeting their working capital requirements.

The credit off-take also came from corporates that had deferred plans to raise cross- border loans, they added.

More Stories on : Fixed Deposits | Credit Market | Public Sector Banks

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