CD issuances at a 4-year high in 2024 as fight for deposit intensifies

certificate-of-deposit

Struggling to mobilise deposits, banks have turned to raise funds through certificates of deposit (CD), leading to a surge in issuance of these securities this year.

Banks have been struggling with slower deposit growth compared to credit growth over the past few months. The widening gap creates an asset-liability mismatch.

“With competition for deposit among banks intense, CD issuances have increased this year,” said Gopal Tripathi, Head of Treasury at Jana Small Finance Bank.

According to the Primedatabase, banks raised Rs 10.76 lakh crore between January and November through CDs, the highest in the past four years. In 2023, banks raised Rs 7.04 lakh crore and Rs 5.99 lakh crore in 2022 via CDs.

The surge is also on account of demand for deposits at the end of the quarter when lending is higher. Instead of repaying the maturing deposits, banks usually opt for rolling over CDs, which helps them to maintain deposits.

At the end of every quarter this fiscal, issuances of CDs rose 75-80 percent over the year-ago period, data shows. In June and September, both quarter-ending months, there was a jump of 80 percent and 77 percent, respectively, from the previous months.

V Ramachandra Reddy, Head Treasury at The Karur Vysya Bank, said banks typically experience heightened demand for deposits to meet credit requirements, especially during quarter-end months.

“In December, the banking sector faces significant CD redemptions amounting to Rs 1.47 lakh crore. Consequently, banks are focusing on rolling over of CDs to maintain deposit growth,” he said.

The gap between deposit growth and credit growth has worried the government and the RBI as well and they have asked banks to focus more on deposit mobilisation.

In August, Finance Minister Nirmala Sitharaman also asked public sector banks (PSBs) to carry out special drives to garner deposits and focus on efficient customer service.

Reddy further said the cash reserve ratio cut by the Reserve Bank of India (RBI) in the December policy has provided much-needed relief by improving loanable funds. This has led banks to adopt a less aggressive and more cost-conscious approach to deposit mobilisation.

The 50 bps reduction in CRR will infuse Rs 1.16 lakh crore liquidity in the banking system. It is to done in two tranches, of 25 bps each on December 14 and December 28.

CRR is a percentage of a bank's deposits that must be kept with the central bank as a reserve. The RBI uses this tool to control money supply, and maintain liquidity.

Money market experts say CD issuances may rise due to stress on the liquidity in the banking system. The RBI in December policy has also stated that systemic liquidity may tighten in the coming months due to tax outflows, increase in currency in circulation and volatility in capital flows.

Tight liquidity may also lead to rise in rates on these instruments.

“As liquidity conditions continue to remain tight and bank deposit also tough to grow, CD will remain favourite instrument for banks,” Tripathi said.