Banks may continue to dip into CDs till deposits see growth

Banks

Indian banks are expected to continue their borrowing through certificates of deposits (CD) to fund their credit needs, as long as the challenges on the deposit front remains in the system, money market experts said.

“With challenges on the deposit front, CD issuances will remain elevated,” said Gopal Tripathi, Head of Treasury at Jana Small Finance Bank.

According to Prime database, banks have issued CDs worth Rs 7.78 lakh crore between January and August 2024, as compared to Rs 4.90 lakh crore in January-August 2023, registering a growth of around 59 percent.

Some banks are avoiding raising their deposit rates aggressively in the expectation that the Reserve Bank of India (RBI) might start cutting rates soon if inflation softens, said Venkatakrishnan Srinivasan, Founder and Managing Partner of Rockfort Fincap LLP.

“By using CDs, banks can raise funds at lower short-term rates instead of committing to higher long-term deposit rates,” Srinivasan added.

Banks have been struggling with slower deposit growth compared to credit growth over the past few months. The increase in gap between deposits and credit, creates an asset-liability mismatch for banks.

The increase in gap between credit and deposit has concerned the government and the RBI, who have asked banks to focus more on deposit mobilisation through innovative products.

"We also need to recognise that with greater innovations in product offerings by banks, newer risks which can impact deposit growth, the demand for higher coverage for deposits, risk based premium would be better options for the deposit insurer to ensure robustness of its finances and also enhance its capability to operate in the changed financial milieu," said RBI Deputy Governor, M. Rajeshwar Rao, on August 19 while delivering speech at IADI Asia-Pacific Regional Committee International Conference 2024 hosted by Deposit Insurance and Credit Guarantee Corporation (DICGC) at Jaipur.

Banks are also offering higher interest rates on deposits, with more than two-thirds of term deposits earning 7 per cent and above, According to the RBI’s September bulletin. The gap between credit and deposit growth is, however, beginning to narrow, RBI Bulletin added.

Srinivasan further added that if the RBI shifts towards rate cuts or loosening liquidity conditions, the demand for CDs may decline, as banks will have less pressure to raise short-term funds.

The expectation of the rate cut has increased in India after the US Federal Reserve cut interest rate by 50 basis points (Bps).