CD issuances hit 15-year high

Outstanding certificates of deposit (CD) issued by banks reached a 15-year high""some say a historic high""in January, and is poised to rise further as banks use CDs to finance credit demand.

CD issuance has also gained in momentum in the past few weeks owing to banks' aggressive issuance to report a larger balance sheet for the year.

CDs outstanding as of January 20 were Rs 34,521 crore, according to details of issuance from July 1991 released by Reserve Bank of India. Details of CDs issued before July 1991 are not readily available.

Bankers say the amount outstanding might well be an all-time high.

CD issuance may continue to scale new highs because funds from banks' traditional source""term deposits, have been hard to come by.

Meanwhile, banks' liquidity needs have risen sharply this year because of the steep rise in credit off-take.

Up to February 17 in the current financial year, banks' credit grew Rs 2.99 trillion compared with Rs 2.71-trillon rise in deposits. During April 1 to January 20, CD issuance rose Rs 19,546 crore. Despite high rates, some bankers see CD issuance as a win-win option for investors and issuers alike.

"If it is a term deposit, the investor has the option to foreclose the account. In case of CDs, the investor can sell it in the market, but the account (funds) will still remain with the bank," said UTI Bank's treasury head, P Mukherjee.

The tenure of CDs is usually 3-to-12 months. Mutual funds, insurance companies and some companies subscribe to CDs. Mutual funds particularly have been big investors in banks' CDs because of the good inflows into their short-tenure plans or fixed maturity plans.

Such big inflow has led fund managers to buy "across fixed income securities like CPs (commercial papers), CDs, and short-term bonds," said Kaushal Singh, fund manager at Standard Chartered Mutual.

In February, nine fixed term plans raised Rs 1,622 crore compared with Rs 783 crore by four such schemes in January. However, during this period three-month CD rates too have risen to 8.75 per cent from about 7.70 per cent a month earlier.

The rise in rates was due to worries that tightness in interbank liquidity would persist while credit demand would expand way above term deposit growth.