Banks raise over Rs 1 trn through CDs in Dec amid liquidity crunch

In an effort to fortify their balance sheets before this quarter’s end, commercial banks have raised Rs 1.16 trillion through certificates of deposit (CDs) in December -- a period marked by tight liquidity conditions.

This is the first time in the ongoing financial year that CD issuances have surpassed the Rs 1 trillion threshold in a month, according to data from the Clearing Corporation of India (CCIL). 

CDs, which are short-term debt instruments, are utilised by banks to raise funds. In November, banks had raised Rs 75,884 crore via these instruments.

This surge in CD issuances comes as deposit growth lags credit growth, prompting banks to resort to CDs, albeit at a higher cost. According to the latest data from the Reserve Bank of India (RBI), bank credit expanded by 15.8 per cent Y-o-Y until December 15, while deposit growth was at 13.3 per cent. These figures exclude the impact of the merger between HDFC and HDFC Bank.

The Reserve Bank of India has been asking banks to ensure their credit and deposit growth is sustainable so that they can refrain from acquiring bulk deposits. The credit-deposit ratio of banks was at 77.44 per cent as on December 15; the incremental credit-deposit ratio was 95.75 per cent.

According to market participants, the struggle to mobilise sufficient deposits, coupled with significant credit growth, has led banks to increasingly depend on short-term debt instruments like CDs. State-owned banks were the primary CD issuers, they said.

Borrowing via these instruments typically rises in the last month of a quarter, as banks strive to deploy additional credit towards the quarter's end to bolster their balance sheets. Banks, this financial year, are facing the added challenge of a substantial liquidity deficit in the banking system.

“The systemic liquidity is very tight and there is credit off-take; deposit mobilisation is very low. Hence, banks are rushing to raise funds through CDs,” said Ajay Manglunia, managing director and head (institutional fixed income), JM Financial. “It is the end of a quarter and banks are also looking to strengthen their balance sheet,” he further said.

The liquidity deficit in the banking system widened to breach the Rs 2 trillion mark on December 18, primarily due to advanced tax payments. It has since consistently hovered around Rs 2.5 trillion, driven by both advanced tax and GST payments.

“The reason is that liquidity in the system is significantly less; the deposit mobilisation is also not great. Also, a lot of dispersals are happening, and the credit-off take is significant,” said Vinay Pai, head of fixed income at Equirus Capital. The RBI injected Rs 2.7 trillion on Thursday.

As banks scrambled to raise funds through CD issuances, the rates on these short-term debt instruments surged in December. The rates on 3-month, 6-month, and 12-month CDs rose by 5 basis points, 14 basis points, and 6 basis points, respectively.

“Deposit rates have been rising. Banks also prefer CDs because they have fixed maturity and there is no worry of a premature withdrawal,” said the treasury head at a private bank.

Market participants expect the liquidity situation to improve in January on the back of government spending.