Banks step up CD issuances to tide over advance tax outflow

Banks are raising funds through certificates of deposits (CDs) to tide over the tighter liquidity deficit expected on account of advance tax payments this month.

According to market participants, banks have already issued around Rs 10,000-15,000 crore of CDs in the first two working days of the month. The deadline for paying advance taxes is September 15.

“The liquidity deficit can go up to Rs 1 lakh crore, when companies would withdraw to make advance tax payments this month," said a treasury official of a Chennai-based public sector bank. Banks have been borrowing around Rs 38,000-56,000 crore from the Reserve Bank of India (RBI) under the liquidity adjustment facility. The advance tax outflows are expected to be about Rs 60,000 crore this month.

Central Bank of India, Punjab National Bank, Corporation Bank, Canara Bank and Oriental Bank of Commerce were among the banks that issued CDs today. Three-month CDs were priced around nine per cent, six-month CDs around 9.3 per cent, and one-year CDs were issued at around 9.6 per cent.

Banks with adequate liquidity are also investing in other bank CDs, though mutual funds remain the primary investors. "We are investing in other bank CDs, since they still offer a spread of 100 basis points over the repo rate," said a treasury manager of a Mumbai-based large public sector bank. Currently, the repo rate is eight per cent.

To comply with RBI's mandate, banks are reducing their investments in liquid schemes of mutual funds. From January 2012, banks would not be allowed to hold more than 10 per cent of their net worth in liquid schemes of mutual funds. RBI had said investments by banks varied immensely as they were parked to take advantage of the higher yields and withdrawn during a of liquidity deficit situation. These liquid schemes would, in turn, invest in bank CDs, which could lead to systemic risks.

"Currently, our investments are around 12 per cent. But this would be brought down to 10 per cent by January, as we have invested in plans that would mature by December," said the treasury official.

CD issuances are expected to rise this month, since it is the end of the second quarter and banks would also resort to window dressing of balance sheets. Banks would also raise funds through CDs ahead of the rate rise expected on September 16—at RBI's mid-quarterly review of monetary and credit policy. According to RBI data, CD issuances had dropped to Rs 11,667 crore in the fortnight ended July 29.