Banks continue to rely on certificates of deposits amid liquidity woes

Outstanding amount on CDs hits all-time high of Rs 5.19 trillion as of fortnight ending February 7

Banks continue to rely on raising funds through certificates of deposit (CDs) amid tight liquidity conditions. Consequently, the outstanding amount on CDs reached an all-time high of Rs 5.19 trillion as of the fortnight ending February 7, according to data from the Reserve Bank of India (RBI).

 

Meanwhile, with expectations of another rate cut by the RBI’s Monetary Policy Committee in the next meeting and a further decline in long-term borrowing costs, the volume of commercial papers (CPs) outstanding reached Rs 4.79 trillion as of the fortnight ending February 15, its highest level since October 2019.

 

“The deposit accretion has been a challenge in the industry, plus credit demand in this quarter remains elevated, leading to a rise in the outstanding amount. This increasing trajectory has been there for a while now,” said Anshul Chandak, head of treasury at RBL Bank. “This is the time when it peaks,” he added, indicating a year-end rush by banks to meet business targets.

 

The banking system has been in a net liquidity deficit for the past 10 consecutive weeks. According to the latest RBI data, the liquidity deficit stood at Rs 2.37 trillion as of Sunday.

 

Banks issued Rs 71,094 crore worth of CDs in the fortnight ending February 7. 

 

“Amid tight liquidity conditions, banks continue to rely on raising resources through CDs. However, given the limitations posed by the liquidity coverage ratio (LCR) framework — where such wholesale funding attracts a 100 per cent outflow rate in the last 30 days of CD maturity and hence acts as a drag on the LCR — these CDs account for just 2.3 per cent of total bank deposits, compared to 8 per cent over a decade ago when the LCR framework was not applicable,” said Anil Gupta, senior vice-president and co-group head — financial sector ratings, Icra.

 

“With expectations of another reduction in policy rates and a further decline in long-term borrowing costs, large borrowers have increased the share of borrowings through CPs, as it may be advantageous to secure long-term funding at a later date when these rates decline further. Accordingly, the volume of CPs outstanding reached its highest level since October 31, 2019,” he added.

 

Experts said the RBI might announce further liquidity measures to inject core liquidity into the system. Core liquidity stood at Rs 34,000 crore as of January 25.

 

“As of January 25, the core was Rs 34,000 crore, which is very low. The swap that the RBI has announced will help ease the pressure on core liquidity and overall system liquidity. We have seen pressure due to foreign exchange (forex) intervention, which might continue for the next four to six weeks. On top of that, we have tax outflows in March,” said Sakshi Gupta, principal economist at HDFC Bank. “After the swap, they’ll have to announce further measures to ease the pressure,” she added.

 

The RBI will conduct a $10 billion buy/sell swap for a tenure of three years on February 28. This will be the second swap auction by the central bank after it infused $5 billion via a six-month swap on January 31.

 

The central bank has injected over Rs 3.6 trillion of durable liquidity into the banking system so far through a combination of open market operation purchases, forex swaps, and longer-duration variable rate repo auctions.