Banks hasten for short-term deposits

With around Rs 1 lakh crore (Rs 1 trillion) of deposits to mature by December, banks have begun hastening the search for short-term sources of funding.

Fund managers say banks raised close to Rs 3,200 crore (Rs 32 billion) by issuing certificates of deposit (CDs) this week and these issuances are expected to pick up. A CD is a promissory note issued by banks, a short-term instrument of fund raising.

According to sources the approximate size of issuances by banks this week are: Punjab & Sind Bank, Rs 400 crore (Rs 4 billion); Bank of Maharashtra, Rs 800 crore (Rs 8 billion); State Bank of Patiala, Rs 500 crore (Rs 5 billion); IndusInd Bank, Rs 1,000 crore (Rs 10 billion) and ICICI Bank, Rs 500 crore (Rs 5 billion). Most of these were in the three-month tenure, at 8.40-8.45 per cent.

"There are a lot of maturities coming up for November and December and before that, banks will have to roll (these) over, so they are coming up with CD issuances. I expect more issuances in December," said Arvind Chari, senior fund manager (debt), Quantum Mutual Fund.

A roll over happens when an issuer reinvests funds from a mature security into a new issue of a same or similar security.

Deposit growth in the banking system has been sluggish, as inflation continues to stay high and savers prefer to put money in alternative investments such as gold and real estate as compared to bank fixed deposits (FDs).

As a result, deposit growth has been significantly short of credit growth for the past couple of years.

Deposit growth was 13.7 per cent in the year to November 2, as compared to 17.6 per cent a year before. Credit growth during the period was 16.2 per cent, as compared to 18.5

per cent a year earlier.

There is a lot of demand for these CDs by fund managers, due to which all the issuances are getting fully subscribed, said Dwijendra Srivastava, head of fixed income, Sundaram MF.

Data from the Securities and Exchange Board of India showed debt fund managers put 37 per cent of their corpus in CDs this October. CDs account for the highest proportion of investments in the debt segment.

J Moses Harding, head - asset liability committee and economic and market research, IndusInd Bank, said banks offer both FDs and CDs. Banks have a cost advantage on CDs, while investors have a liquidity advantage, as CDs are traded in the secondary market.

While corporate entities prefer FDs for higher yield, market participants such as banks, non-banking finance companies and fund houses prefer CDs for an easy exit to liquidity.

"The cost advantage for banks on CDs is around 25 basis points for a three-month tenor," said Harding. He said banks were raising these to adjust their asset-liability position.

However, Ajay Manglunia, senior vice-president, Edelweiss Securities, said CD issuances would be lower than last year.

This was because public sector banks were in the process of reducing their borrowing by way of CDs, after the finance ministry issued norms requiring banks to reduce the proportion of bulk deposits and CDs to 15 per cent of the total deposits by March 31, 2013. The norms were issued earlier this year.

The total amount due on CDs by commercial banks was Rs 3,53,120 crore (Rs 3.53 trillion) for the fortnight ended October 19, compared with Rs 3,85,936 (Rs 3.85 trillion) crore for the fortnight ended October 21, 2011, shows Reserve Bank of India data.