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C. Shivkumar
K. Ram Kumar

Bangalore/ Mumbai, March 20 In a rare foray, Citibank India hit the domestic money market to raise Rs 500 crore through Certificate of Deposits (CDs). The bank raised three-month funds at a steep coupon rate of 8.25 per cent. The coupon rate is almost 100 basis points higher than what a public sector bank would pay for mobilising resources through this instrument.

Incidentally, State Bank of India’s associate bank, the State Bank of Mysore (SBM), which also entered the market on Wednesday to raise Rs 500 crore, was able to raise funds at a finer pricing i.e. 115 basis points lower. In fact, SBM’s CD placement was for a longer tenure — six months — and was priced at 7.10 per cent.

Notwithstanding the fact that both banks enjoy a similar rating — Citibank’s CD is rated P1+ by Crisil and SBM is rated A1+ by ICRA — the pricing differential is significant.

Market players pointed out that coupon rate typically factors in the risk regarding redemption of the instrument and payment of interest. Higher the coupon rate, higher the risk.

CDs are negotiable money market instruments of 7 days to one year duration. They are issued by banks to raise short-term resources. The minimum deposit that can be accepted from a single subscriber is Rs 1 lakh and in the multiples of Rs 1 lakh thereafter. CDs can be issued by banks to individuals, corporations, companies, trusts, funds, associations, etc.

Citibank declined to make any substantive comment on its foray into the domestic CD market. Instead, a spokesperson said, “We use various funding options including the Certificate of Deposit programme. Our balance sheet is largely funded by granular customer deposit liabilities. However, we access other forms of funding from time to time to optimise our liquidity position.”

Citibank, in the past, funded its asset growth in the country mostly through a combination of swap funds, securitisation and big ticket deposits. However, securitisation markets have nearly evaporated. Currently, there are few takers for securitised papers in the financial markets.

Fixed income and balanced schemes of mutual funds were among the largest buyers of securitised papers in the past. Mutual funds have churned their portfolios in both these schemes, switching to Government securities, leading to spreads between G-secs and Triple ‘AAA’ rated corporate bonds surging to almost 300 basis points.

Besides, swap funds have become expensive with widening forward premia. The Treasury Euro Dollar spreads are currently about 110 basis points. This spread is a measure of risk between the US Treasury (three-month Bills) and the three-month London Interbank offered rate. In addition, forward premia has also widened to 3.60 per cent, currently up from 2.5 per cent in April this year.

Citi has seen little increase in capital from its parent, though there were little outflows. Citi also has a sizeable chunk of the foreign institutional investor business. Banking sources said that the FII business in the past had provided them substantial float funds. With FIIs exiting in droves, the float funds have shrunk in quantity, the sources said.

Citi also relied on corporate deposits against guarantees provided. However, such guarantees are now restrained as part of the global tightening the bank has adopted. As a result, corporate deposit accretions have slowed down, the sources said.

But Citi was likely to make more CD issuances in future. This was evident from its outstanding rating with global rating agency Fitch — F1+ — for up to Rs 5,000 crore of CDs.

More Stories on : Foreign Banks | Short Term Instruments

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