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C. Shivkumar

Bangalore, Nov. 5 With loan growth remaining weak, costs of certificate of deposits (CDs) funds are expected to nose dive.

Highly placed bank officials said that there was little need for bulk funds, unless they were “priced down” further.

The incremental credit-deposit ratio for the current fiscal so far is just 29 per cent. For the corresponding period last year, the ratio was 88 per cent.

At least 30 per cent of bank deposits are in the form of CDs — a type of bulk deposits. Most banks have already retired their preferential rate bulk deposits. Bulk deposit accretions are now almost entirely through CDs. In fact, without exception, banks are already exercising caution in absorbing CD funds. CD bids are accepted only if there is large liquidity demand in the form of credit or for meeting large redemptions.

However, at the moment, bankers said, neither situation existed. This resulted in a liquidity overhang in the banking system — evident from the high recourse to the reverse repurchase window of the RBI’s Liquidity Adjustment Facility Auctions. At Thursday’s auction, for instance, the recourse to the reverse repo window was Rs 1,38,760 crore.

The resistance to CDs is also evident from the drop in intake of such funds. In September, for instance, banks had raised Rs 17,100 crore through CDs. In October, the figure was down to Rs 7,175 crore. Bankers said that this figure is likely to drop further in the coming weeks, with the RBI disapproving investments in mutual funds. Mutual funds, non- life insurance companies and corporates with cash surpluses are currently among the largest investors in CDs.

One-year CDs are currently priced at around 5.5 per cent as a result. But some banks are raising shorter term CDs, for eight and nine months at rates as low as 4.5 per cent. Accordingly, traders said that unless there is a major pick-up in credit, demand for CD funds intake is likely to remain low.

Besides, banks are also mopping up retail deposits, particularly time deposits. Time deposit accretion into the banking system currently is about Rs 4,000-5,000 crore per day, officials said. They said that the accretions from retail depositors are currently sufficient to meet credit demand, without resorting to large high-cost deposits.

With banks pressuring CD investors to push down yields, bulk investors are now moving to other short-term instruments, particularly commercial paper floats by public sector undertakings and triple-rated financial institutions at rates well below 6 per cent for one-year tenure. HDFC, for instance, raised Rs 500 crore through one-year CPs on Thursday at an yield of 5.9 per cent. Bankers said that if credit off-take fails to pick up in the busy season, even these rates could come under pressure.

More Stories on : Banking | Short Term Instruments

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