CD issuances by banks jump over 4 times in Apr-Jan to to Rs 5.35 lakh crore

Though banks have been raising retail and bulk term deposits to meet the rising loan demand, it takes some time for deposits to flow into the system. To bridge the short-term funding needs, banks are issuing CDs, which also provide them a cheaper avenue to raise funds, according to Care Ratings’ Associate Director – BFSI Research Saurabh Bhalerao.

“Since the deposit base in the banking system is yet to increase, banks are using non-deposits routes such as issuances of CDs, tier-I and tier II and infrastructure bonds to raise money,” rating agency ICRA’s Senior Vice President, Co Group Head – Financial Sector Ratings, Anil Gupta said.

Banks used CD route to raise Rs 2.33 lakh crore during fiscal 2022 and Rs 1.31 lakh crore in fiscal 2021. In the previous two fiscals, CD issuances declined due to the low credit demand after economic activity came to a standstill because of Covid. Since the loan growth was muted during those fiscals (FY 2022: 9.46 per cent; FY 2021: 4.98 per cent), the demand for credit was met by deposits in the system and so, CD issuances were low.

“CDs are a quick fix for a bank, but finally you have to grow your retail deposit base. Building a granular deposit base takes some time, so you may build it by doing CD (issuances). You cannot have a strategy to make up for retail term deposit growth by (issuing) CDs,” Kotak Mahindra Bank’s Whole time Director KVS Manian said, adding that his bank has always focussed on building granular deposits.

After the 250 basis points hike in repo rate by the Reserve Bank of India (RBI) since May 2022, banks have increased lending and deposit rates. However, the pace of increase in deposit rates has been slower. The weighted average domestic term deposit rate on fresh deposits and outstanding deposits increased by 213 bps and 75 bps respectively between May and December 2022.

Earlier this month, RBI Deputy Governor Michael Patra had said that though the difference between the credit and deposit growth rates has narrowed, there is still a difference. “It is really up to the banks to mobilise deposits and make up the gap. They are doing so through certificate of deposits and reducing non-SLR investments but they need to mobilise deposits on their own to meet the gap,” Patra had said in the post monetary policy press conference on February 8.

The CDs issued by banks are subscribed by corporates and mutual funds. Corporates find CDs more attractive compared to parking funds with banks in bulk deposits due to higher interest rates offered by the former.

“For all companies, the preferred route is certificate of deposits. The CDs are issued above the market rate and fixed deposit rates often lag the market rate,” said Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank.

According to the RBI data, in the fortnight ended January 27, 2023, banks issued CDs at 6.82-7.3 per cent. However, this data does not give interest rates on CDs of different tenure. When compared to this, the country’s largest lender State Bank of India (SBI) offers an interest rate of 5.5 per cent for bulk deposits (Rs 2 crore and above) maturing between 46 days and 179 days. Similarly, for deposits maturing in between 180 days to less than one-year, SBI’s rates vary between 6 per cent to 6.25 per cent.

Since CDs are liquid and tradable, the mutual fund industry also subscribes to these instruments to meet their redemption pressure.