As credit demand is gathering momentum in the economy, Indian banks are aggressively raising funds via certificates of deposits. Banks have seen that CDs are currently the best option for raising funds as bond yields are moving high in line with the repo rates. Furthermore, most banks have not raised deposit rates in order to boost their net interest margins.
Apart from that, the liquidity surplus in India's banking system has fallen below ₹1 trillion and has averaged around ₹1.4 trillion in August, down from ₹1.9 trillion in July and ₹2.92 trillion in June, according to media reports. This sudden and sharp drop in liquidity is also pushing banks toward CDs.
According to the RBI data, credit growth in the system was 14.52 percent in the fortnight ended July 29. Credit demand is increasing from consumers to businesses. For Instance, the share of housing loans in bank credit increased to 14.4 percent in June from 13.1 percent in March 2020.
This occurred at a time when interest rates began to rise after a long period of decline. So far this year, the Reserve Bank of India has raised interest rates by 140 basis points, to 5.40%.
The impact of rising rates has been borne by the corporate bond market, with issuances falling to a four-year low in the first quarter amidst higher investor risk aversion on fear of mark-to-market losses. ICRA said in a report that this prompted large borrowers to shift to banks for their incremental funding requirements, leading to a spike in bank credit growth which is the highest in the past three years, even as deposit growth lagged credit growth.
Indian banks have increased their fundraising activity through the issuance of certificates of deposits, as funding in the banking system continues to contract, analysts said.
Deposit growth in the system was 9.14 percent in the two weeks ending July 29, 538 basis points lower than credit growth in the same period.
Indian private and state-run banks have raised around ₹30,000 crore ($3.76 billion) through two-month to one-year CDs in the two weeks to August 19, sharply higher than the roughly ₹5,000 crore in the previous two weeks, data compiled by Reuters showed.
Larger lenders, such as Punjab National Bank and Bank of Baroda, have also jumped on the bandwagon and are actively borrowing funds through three-month and one-year notes. These lenders are paying around 6.60%-6.74% for one-year funds and are keen to tie up funds for a year in anticipation of policy tightening in the near future.
Market participants also said that a pick-up in credit growth as the economy revives will create the need for a steady flow of funds at banks. At the same time, mutual funds have been happy to park funds in CDs, thus making it a win-win for issuers as well as investors.
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