Sustained credit growth amid almost plateauing interest rates is prompting Banks, especially state-owned, to step up certificate of deposit (CD) issuances for mopping up funds.

Banks may be more inclined to pay higher interest rates for shorter period on CDs to mobilise resources vis-a-vis paying higher interest for longer period on fixed deposits (FDs) as the expectation is that the rate -setting monetary policy committee (MPC) will start cutting repo rate from the fourth quarter of FY24, say market players.

For example, Banks such as Canara Bank and Punjab National Bank are attracting good inflows in the highest interest rate (7.25 per cent) paying maturity bucket of 444 days.

On an average, in July, Banks raised three-month (90 days) CDs at 6.90-6.95 per cent, hoping they can roll over the funds on maturity at slightly lower rates if the MPC continues to stay on hold and the liquidity situation eases. Canara Bank and Punjab National Bank are understood to have borrowed about ₹4,000 crore each via CDs.

So, Banks want to minimise the outgo on account of liabilities, preferring to pay higher interest rate for a shorter period on CDs even as they try to ensure they don’t get locked into high cost liabilities (FDs) for a longer period.

According to RBI data, scheduled commercial banks’ aggregate deposits and non-food credit grew by ₹9,86,124 crore and ₹10,84,770 crore in the financial year so far (up to July 14, 2023). So, credit growth is outpacing deposit growth, pushing banks to overcome the gap via the borrowing route, mainly by issuing CDs.

Venkatakrishnan Srinivasan, Founder and Managing Partner of Rockfort Fincap LLP, observed that Canara bank, Punjab National Bank and Indian Bank have been amongst the top five CD issuers this year so far. 

“Cost of funds for banks is going up due to the cumulative 250 basis points increase in repo rate since May 2022. There is ample demand for credit. All big Banks are competing with each other for credit and deposit growth. 

“Banks are paying higher interest rates on CDs to woo the investors and garner large quantum of funds to meet the credit growth. 

“...Further, beginning July, banks have been witnessing intermittent liquidity issues in the market. Hence, they preferred to tap bulk resources through CDs. Some of them have raised more CDs than bonds since last year,” Venkatakrishnan said.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “Most of the Banks are issuing CDs. Currently, liquidity is tight, with deposit growth lagging credit growth. It is expected to be tight for the next three months till the festival season comes. So, Banks will be more interested in issuing 90 days.”

Aditya Gore, Head - Fixed Income, Nuvama Wealth Management, observed that since Banks are seeing credit demand, they are borrowing at 6.90 per cent levels via CDs, with most issuances being concentrated in the three month maturty bucket, and will be rolling over these funds.on maturity.

In the primary market, fund mobilisation through issuances of CDs at ₹1.45 lakh crore during 2023-24 (up to June 30) was lower than ₹1.54 lakh crore in the corresponding period of the previous year, per RBI data. However, market players say if CD issuances for July are added, fund mobilisation via this route could be higher in the first four months of FY24 vis-a-vis the year ago period.

The MPC has kept the policy repo rate unchanged at 6.50 per cent at its last two meetings and market expectation is that it may remain in pause mode till the third quarter of FY24. Thereafter, a rate cut is seen, with in turn, could bring down banks’ cost of funds.

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