Lenders are issuing certificates of deposit (CDs), a money market instrument of which mutual funds are emerging as the primary buyers. Recent issuers of CDs include
Shown data from the clearing corporation of , , , and , India and compiled by India Rating,
Outstanding CD sales nearly tripled to Rs 2.49 lakh crore at the end of July, from Rs 84,702 crore at the end of December last year. reserve Bank of India ,reserve Bank of India) has shown.
The recent surge in CD issuance is largely to address the issue of liquidity as credit demand continues to drive deposit growth. Bank officials said raising funds through CDs is 50 basis points cheaper than bulk deposits.
One basis point is 0.01%.
For investors, CD rates are more attractive than those of shorter duration government debt securities.
India Ratings data shows CDs raised by banks in a month saw a sharp rise of Rs 40,000 crore in the June quarter as compared to an average of Rs 8,000 crore in the December quarter and Rs 26,000 crore in the March quarter in FY22 .
Soumyajit Niyogi, Director, India Ratings said, “The sharp jump in credit demand is forcing banks to raise resources from the money market amid contracting surplus liquidity. “The expansion of retail and corporate deposits will take time.”
The credit rating company believes that if credit growth outpaces deposit growth,
The number of scheduled commercial banks on bulk deposits is also likely to increase, leading to higher cost of funds and instability in the asset-liability structure of banks.
Bank credit grew 14.5% year-on-year to Rs 123.7 lakh crore as on July 29 this year. In contrast, deposit mobilization climbed 9.1% to Rs 169.7 lakh crore. Banks are required to mandatorily set aside a portion of the deposits to meet the prudential norms.
Rajeev Radhakrishnan said, “Bank CDs are offering reasonable spreads in one-year Treasury bills and are trading at similar levels to AAA bonds, which makes it attractive to invest on a relative basis, as these are money markets. The tools are quite fluid.” , Chief Investment Officer – On Loan
Mutual Fund, India’s largest asset management company.
CDs with up to 12-month maturities offered rates in the range of 5.33-6.38 percent compared to the 5.56-6.20 percent range received by Treasury bills in the primary market with 91-day, 182-day and 364-day maturities .
CD issuance was curtailed due to lack of credit demand and additional liquidity. “These factors have changed, leading to a revival in the issuances,” Radhakrishnan said.
Surplus liquidity in the banking system is now around Rs 1.30 lakh crore versus Rs 6.73 lakh crore as on December 31, 2021.
“Raising funds through CDs is more cost-effective than raising bulk deposits,” said the managing director of a medium-sized public sector lender.
“Compared to retail deposits, there may not be much cost savings, but as compared to large deposits, i.e. bulk deposits, banks can save at least 50 basis points in money raised through CDs. ”