Banks rush to raise funds via CDs amid credit demand

Lenders are issuing certificates of deposit (CD), a money market instrument of which mutual funds are emerging as primary buyers. Recent issuers of CDs included

, , , , and , showed data from the Clearing Corporation of India and compiled by India Ratings.

Outstanding CD sales are up nearly three times to about Rs 2.49 lakh crore at the end of July against Rs 84,702 crore at the end of December last year, data from the Reserve Bank of India (RBI) showed.

The recent surge in CD issuance is largely to address the liquidity issue as credit demand continues to outpace deposit growth. Raising funds through CDs is up to 50 basis points cheaper than bulk deposits, bank executives said.

One basis point is 0.01%.

For investors, CD rates are more attractive than shorter duration government debt securities.

CDs raised by banks in a month have shown a sharp rise to Rs 40,000 crore in the June quarter compared with the average Rs 8,000 crore in December quarter and Rs 26,000 crore in March quarter in FY22, India Ratings data showed.

“A sharp pick-up in credit demand is forcing banks to raise resources from money markets amid contracting surplus liquidity,” said Soumyajit Niyogi, director at India Ratings. “Retail and corporate deposits will take time to expand.”

The credit rating company believes if credit growth continues to outpace deposit growth,

of scheduled commercial banks on bulk deposits is also likely to increase, leading to a higher cost of funds and volatility in the asset-liability structure of banks.

Bank credit expanded 14.5% year-on-year to Rs 123.7 lakh crore as on July 29 this year. By contrast, deposit mobilisation climbed 9.1% to Rs 169.7 lakh crore. Banks are required to mandatorily set aside a part of deposits to meet prudential norms.

“Bank CDs are offering reasonable spreads over one-year Treasury Bills and are trading at similar levels as AAA bonds, which makes it incrementally attractive to invest on a relative basis, more so as these money market instruments are quite liquid,” said Rajeev Radhakrishnan, chief investment officer – debt at

Mutual Fund, India’s largest asset management company.

CDs up to 12-month maturities offered rates in the range of 5.33-6.38 percent compared with 5.56-6.20 percent range yielded by Treasury Bills in the primary market with 91-day, 182-day and 364-day maturities.

CD issuances had dried down in the absence of credit demand and excess liquidity. “These factors have changed, leading to a revival in issuances,” said Radhakrishnan.

Surplus liquidity in the banking system is now around Rs 1.30 lakh crore versus Rs 6.73 lakh crore on December 31, 2021.

“Raising funds through CDs is more cost effective than raising bulk deposits,” said the managing director at a midsized public sector lender.

“As compared to retail deposits, there may not be much cost savings, but compared to bigger deposits, ie, bulk deposits, banks could save at least 50 basis points in funds raised through CDs,” the official said.