As liquidity tightens, corporate investors seek safety of banks

With returns from liquid funds turning negative, firms look at short-term bank fixed deposits

Following the Reserve Bank of India’s (RBI) liquidity tightening norms, asset management companies are increasingly turning to short-term fixed deposits of banks. Lenders have also been quick to spot the trend and have made their deposits more attractive by raising rates for short-term deposits. After RBI announced the tightening of the liquidity adjustment facility to Rs 75,000 crore on July 16, banks and companies aggressively started withdrawing from ultra short-term and liquid funds. This resulted in liquid funds giving negative returns.

SBI chairman Pratip Chaudhuri said inflow of unfixed deposits (SBI’s definition for short-term fixed deposits) had risen to Rs 8,000 crore, a significant growth in a short span, after July 15. “High volatility in the market has prompted some investors to review their priorities. Now, the safety and liquidity are more important over returns. The flight to safety is evident,” he said, adding the outstanding amount under this category of deposits is about Rs 66,000 crore.

The mid-size companies and small enterprises, which have surplus money but lack sophisticated, have become cautious in volatile environment. Perhaps, concerns safety takes precedence over returns, said two executives with large public sector banks.

There has been some recovery in liquid funds. The returns in the past week were for a fortnightly liquid fund was seven per cent. However, ultra short-term funds returned only three per cent due to the high volatility. Banks have begun to raise deposit rates to attract the money. After Axis Bank and HDFC Bank, Deutsche Bank AG India unit has raised deposit rates 25-150 basis points across various maturities. The raise is sharp in the case of different maturities up to one year. It raised the rate for 271 days to one year to 8.5 per cent from the seven per cent.

HDFC Bank has increased deposit rates on maturities ranging from seven days to up to six months by 100 basis points though reduced rates on deposits maturing between six months to one year by 75 basis points. Axis Bank increased 30 days to 13 months deposit rates by 50-225 bps.

According to a corporate head of a private sector bank, companies have become quite nervous with the negative returns because they invest substantial amounts,” said the corporate banking head of a private sector bank. “A leading consumer goods  company that typically has Rs 4,000-5,000 crore at one time in liquid funds has recently chosen to shift this amount to short-term bank deposits. There are many such cases,” he said, adding banks were under pressure to raise rates to hold onto these large clients.

SBI had launched product “unfixed deposits” about 18 months ago to work parallel to liquid fund schemes of mutual funds. These deposits are available for terms ranging from seven days to less than a year. Money can be withdrawn anytime after seven days, without charges. If unit/ company has some spare cash, it could fetch higher return and good liquidity. The sharp movement in bond yields has raised the uncertainty. An IDBI Bank official said corporate have become careful about the protecting the value besides safety.

The volatility in the money markets has made them cautious. The feedback indicates companies with surplus are working on reallocation of funds and moving them to deposits. Events in last the three weeks have made companies with varying sizes to review their investment strategies. The liquid funds had seen redemption pressure from banks. Now with a sharp rise in yields, MF funds run the risk of booking mark to market losses, pointed out a financial sector analyst.