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| Banks halt CD issues to cut costs |
| BS Reporter / Mumbai Jan 29, 2009, 00:33 IST |
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Changes in Sebi norms have also slowed down demand for short-term paper.
Banks did not issue any certificate of deposits (CDs) On Wednesday as they are flush with cash and are trying to lower their cost of funds by repricing their deposits.
In addition, the changes in investment norms for liquid schemes of mutual funds have resulted in a fall in demand for CDs.
“Banks were waiting for cues from the Reserve Bank of India (RBI) on interest rate in the coming days. With RBI asking banks to lower lending rates, banks are now trying to ensure that their cost of funds comes down over the next few days so that they can effect the next round of rate cuts,” said a dealer at a bond house.
The asset liability committees of banks are expected to meet over the next few days to look into the issue of repricing deposits. “Fresh issuance is expected to begin next week at reduced rates since there is abundant liquidity in the system,” said a senior executive at a public sector bank.
According to data on the RBI website today, banks parked Rs 63,250 crore with the central bank through the two reverse repo operations, while no borrowings took place through the repo route.
Yesterday, banks had parked Rs 51,765 crore with RBI through the reverse repo window and there were no borrowings. Banks have consistently placed over Rs 40,000 crore on a daily basis with the central bank over the last few weeks.
In the third quarter review, RBI left policy rates unchanged while maintaining that its actions over the last four months have given enough space to banks to lower interest rates further. The central bank has reduced the cash reserve ratio, or the proportion of deposits set aside by banks, by 400 basis points to 5 per cent, while the repo rate — or the rate at which it lends to banks — has been cut by 350 basis points to 5.5 per cent.
To discourage banks from parking funds, instead of lending, the reverse repo rate has been pared by 200 basis points to 4 per cent.
Since November, public sector banks have reduced lending rates by up to 150 basis points, while private banks have lowered interest rates by around 50 basis points. Deposit rates have, however, fallen by as much as 300 basis points.
Bankers said that with Securities and Exchange Board of India’s (Sebi) directive to fund houses that liquid funds would have no exposure to CDs over 180 days from February 1, which will be further brought down to 90 days from May 1, has brought down the demand for these short-term papers.
“Banks often assess the demand for CDs before they issue them. Given the change in norms announced by Sebi, the demand has come down and so you are seeing the absence of fresh issues,” said a senior bank executive.
According to Thomson Reuters data, the volume in the secondary CD market today was Rs 265 crore as against Rs 250 crore yesterday.
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