After the banking regulator Reserve Bank of India implemented steps to drain out surplus funds with lenders, banks have raised funds through certificates of deposit amid tighter liquidity conditions, reported The Economic Times.
From August 18 to August 23, banks have issued certificates of deposit worth ₹21,470 crore in the primary market, data provided by industry sources showed. The amount issued over just that period is more than half of the sum of ₹40,625 crore issued in the whole of July, with private banks leading the pack, the data showed.
The acceleration in the issuance of CDs — which are short-term debt instruments used by banks to raise funds —— comes after the RBI imposed an incremental Cash Reserve Ratio (ICRR) of 10% on the growth in bank deposits from May 19 to July 28.
The ICRR requirement, which became effective from the fortnight beginning August 12, is estimated to have impounded funds worth around ₹1.1 trillion from banks. The central bank will review the ICRR by September 8.
“With the implementation of ICRR for a brief period, the tightness in the banking system liquidity is cropping up. As a measure to address this additional fund, private banks have resorted to issuing certificates of deposits (CDs), especially banks with relatively less access to easy deposit,” analysts from India Ratings & Research wrote.
According to the data four public sector banks — Canara Bank, Punjab National Bank, Bank of Baroda, and Bank of Maharashtra — — have issued CDs worth a total of ₹8,100 crore in the primary market from August 18 to August 23. Meanwhile, five private banks — Axis Bank, ICICI Bank, IDFC First Bank, HDFC Bank and IndusInd Bank — have issued CDs with a total of ₹13,370 crore in the primary market over the same period.
The increased reliance on CDs comes at a time when rates on these short-term debt instruments have climbed, making it more expensive for banks to raise funds through that route. Rates on three-month CDs have hardened around 10-15 basis points since August 1, money market traders said.
“I-CRR has withdrawn ₹1.1tn from core liquidity, resulting in weighted average call rate rising above the repo rate. The pressure on overnight rates has risen further post GST payment due date with system liquidity falling into deficit,” Gaura Sengupta, economist, IDFC First Bank said.
