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Certificates of Deposit issuances rise on high demand

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Volumes touch as much as Rs 8,000 cr in a day as vie to shore up deposits.

In the last minute rush to shore up deposits, banks have been aggressively issuing Certificates of Deposit (CDs), with the volumes touching as much as Rs 8,000 crore in a day. Volumes can go up to Rs 1 lakh crore in the month of March, said a bond dealer with a brokerage firm. Banks raised around Rs 70,000-80,000 crore in February 2011, he said.

“Most of these CDs are roll-overs that are coming up for redemption in March,” said a senior official with a public sector bank. Banks that are falling short of funds to repay them have no option but to re-price them at higher rates, he added.

Bank Maturity Volume (Rs cr) Interest rate (%)
Allahabad Bank 3 months 400 10.00
Punjab & Sind Bank 6 months 350 10.08
Bank of India 1 year 150 10.08
Federal Bank 1 year 100 10.15
OBC 1 year 250 10.02
Source: Reuters 

Also, most issuances are of three months to six months maturities as banks require funds to meet the temporary shortfall. “10-15 per cent of the total deposits will constitute CDs and most of the banks are raising short-term funds that will get re-priced at lower rates,” said a banking analyst with a domestic brokerage.

CD rates across all maturities have crossed the 10 per cent level. Where three-month CDs are being issued at around 10 per cent, one-year CDs are being issued at 10.15 per cent.

This temporary funding may prove to be costly for banks even if fall in future. “Clearly, the pressure on margins will be reflected in the April-June quarter when most of these CDs mature,” said Suresh Ganapathy, head of financial research team, Macquarie Securities. The short-term rates are expected to come down by 50 to 100 basis points within a year, he added.

The impact of high-cost bulk deposits on a bank’s margins will depend on two factors: the extent of reliance on bulk deposits and their maturities.

On the other hand, banks with comfortable liquidity and mutual funds are taking full advantage by investing in these CDs as they will earn good returns irrespective of the fluctuations in interest rates going forward.

“While better liquidity conditions may increase the supply of funds, thus cooling down the short-term rates, further hikes in policy rates by the Reserve Bank of India may limit the fall,” said an analyst with a domestic brokerage. Deposit rates are still below the peaks witnessed during 2008, he added.

On Wednesday, CD rates were down marginally by 5-10 basis points across maturities, reflecting some improvement in liquidity.

A head of treasury with a large public sector bank said by the end of the first quarter of financial year 2011-12, one-year CD rates should come down to about 9.5 per cent.

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