Banks raising high cost funds to tide over liquidity crunch

Faced with tight liquidity condition, banks have started offering high interest rate of 9.5 per cent on certificate of deposit (CD), 125 basis points more than what they are giving to fixed deposit holders.

Currently, the rates of CD, an instrument generally issued by commercial banks with maturity varying between 7 days to one year, are varying between 9.2 per cent to 9.5 per cent depending on the banks, treasury head of a public sector bank said. A CD bears a maturity date and a specified fixed interest rate.

At the same time, 1-2 year fixed deposit rates of some leading banks currently stand at 8.25 per cent.

One year CD rate is always higher than 10-year government paper. However, in the last few weeks the corridor has widened substantially.

"The CD rates are substantially higher than the 10-year government bonds as well as retail fixed deposit rates," Dhanlaxmi Bank Treasury head Manish Sarraf said.

With deposits growth yet to pick up, banks are forced to offer higher rates on CDs to meet their resource requirements, he said.

The liquidity condition is tight and banks are borrowing over Rs 1 lakh crore from the Reserve Bank under liquidity adjustment facility (LAF), he added.

Since November 8, banks have borrowed an average over Rs 1 lakh crore through the liquidity adjustment facility of RBI.

According to treasury head of another private sector lender, tight liquidity condition is likely to continue for next two months or so.

Next week, the system would be drained out of Rs 50,000 to 60,000 crore on account of advance tax payment due on December 15.

Spending on the part of the government can ease the liquidity situation.

"I do think, that in the second half of this fiscal, and particularly in the last quarter, public spending will increase, and as a consequence of this, the liquidity situation in the system will improve," PM's Economic Advisory Council (PMEAC) Chairman C Rangarajan had said last week.

"I think RBI will take necessary steps to ensure that adequate liquidity is present in the system," he had said.