Lesser participation from mutual funds, slow credit offtake and growth in retail deposits have deterred banks from taking up high-cost bulk deposits in the first quarter of 2011-12. As a result, issuances of certificates of deposits (CDs) have fallen by around 32 per cent between April and June as compared to the January-March quarter of 2010-11, according to market participants.

CDs are debt instruments issued by banks to raise funds for maturities up to one year.

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In May, the Reserve Bank of India (RBI) had mandated that banks could invest only up to 10 per cent of their net worth in liquid schemes of mutual funds. Banks have time up till October to abide by the norm.

Following the mandate, bank investments in mutual funds have shrunk by 23 per cent as on June 3, according to data released by RBI. This had an impact on the participation of mutual funds as they are the major investors in CDs.

A major chunk of CDs issued in the January-March quarter of 2010-11 were due for redemption in the April-June quarter. “Banks feared that once redeemed these funds will never find their way back and hence CDs were rolled over at a much lower rate,” said a bond dealer with a domestic brokerage.

Rates on CDs across maturities have fallen by 10-15 basis points since April. Today banks issued three-month CDs at 8.35 per cent, six-month CDs at 9.45 per cent and one-year CDs at 9.75 per cent.

Also, credit growth has moderated in the first quarter of the current financial year. Bank advances grew at 20.7 per cent as on June 17, as compared to the same period last year. Credit growth was at 22 per cent as on April 8, and 23.5 per cent as on January 14.

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