IndusInd Bank fiasco prompts large state-run banks to tap CD market

Following the disclosure that it had found discrepancies in its derivatives portfolio, IndusInd Bank has aggressively tapped the certificate of deposits (CD) market to raise funds amid a flight of deposits. In March, the bank raised Rs 16,550 crore in CDs at a coupon rate of 7.75-7.9 per cent. This is about five times higher than the average amount it has typically raised from the CD market previously.

 

Incidentally, many large state-owned banks, including Punjab National Bank (PNB), Bank of Baroda, Indian Bank, Canara Bank, Union Bank, and Bank of India raised large amounts of funds via CDs during this period.

 

Market sources indicated that the fiasco at IndusInd Bank may have prompted large state-owned banks to tap the CD market to raise funds for investing in IndusInd Bank’s CDs. This would allow them to secure a favourable spread over their borrowing costs.

 

A treasury official at a large bank said that state-owned banks have majorly subscribed to IndusInd Bank CDs because of the attractive yields they had to offer. “The kind of rates IndusInd CDs were offering, everyone would like to invest,” he said, adding that the rates increased by 15-20 basis points (bps) within a week.

 

Yields on PNB’s CDs ranged from 7.56 per cent to 7.58 per cent, while Bank of Baroda’s CD yields ranged from 7.55 per cent to 7.6 per cent. IndusInd Bank’s CD yields were higher, between 7.75 per cent and 7.9 per cent, according to Clearing Corporation of India (CCIL) data.

 

On March 10, IndusInd Bank had raised Rs 1,890 crore by issuing 12-month CDs at a coupon rate of 7.75 per cent. On the same day, the bank disclosed that in an internal review it had found discrepancies in its derivatives portfolio, which will have an adverse impact of 2.35 per cent on its net worth. 

 

The bank stated that it had appointed an external agency to review the estimate of the loss in the derivatives portfolio. Later, the bank disclosed that it has decided to appoint an independent professional firm to conduct a comprehensive investigation to identify the root cause of the discrepancies.

 

The following week, the lender raised Rs 11,000 crore by issuing CDs across a range of maturities, with coupon rates varying between 7.8 per cent and 7.9 per cent. This marked a 15 bps increase from the rates the bank offered on its CDs in the previous week, according to CCIL data.