CD issuances rises in August amid lagging deposit growth in banks

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Fundraising through certificates of deposit (CDs) increased a healthy 44 percent on-year in August amid lagging deposit growth at banks and rollover of some papers that were set to mature.

CDs are short-term debt instruments used by the banks to raise funds.

“Banks aim to maintain a prudent credit-deposit ratio, as advised by the RBI (Reserve Bank of India), and fund assets through retail and sustainable resources. With higher rates on term deposits, retail deposits are gaining traction, but CDs enable banks to generate higher deposits within a day or two,” said V Ramachandra Reddy, head of treasury at Karur Vysya Bank.

Alok Singh, group head, treasury, CSB Bank, said CD issuances have mostly risen to fund the gap created by excess credit growth. Banks need to maintain a stipulated credit-deposit ratio so in the current scenario, they prefer deposits over borrowing.

According to information from Prime Database, banks raised Rs 82,020 crore via CDs in August this year, markedly higher than the Rs 57,170 crore raised in August 2023, 44 percent higher on a yearly basis and 23 percent higher on a monthly basis. In July 2024, banks had raised Rs 67,160 crore through CDs.

Banks raised Rs 4.14 lakh crore between April and August 2024 by issuing CDs, compared to Rs 2.63 lakh crore in the same five months of the previous fiscal, a 58 percent increase on an annualised basis. CD issuances surged in August despite the surplus liquidity in the banking system. That's because deposits have not kept pace with borrowings from banks.

According to the RBI's August bulletin, in the primary market, CD issuances amounted to Rs 3.49 lakh crore during 2024-25 (up to August 9), significantly higher than Rs 1.89 lakh crore in the corresponding period of the previous year.

“This increase can be attributed to deposit growth lagging credit growth, prompting banks to rely on alternative sources of funding,” the RBI bulletin said.

KVB's Reddy said that the rush for issuances by banks are in three-month buckets, the rates are moving between 7.10 percent and 7.28 percent for tier-1 banks since April 1 of this year. However, the one-year CD is stable at 7.60-7.70 percent.

Banks are expected to increase their fundraising through CDs if the deposit growth remains slow, experts said.

“Credit is growing at a faster pace, while reserve money creation remains subdued. Therefore, we can expect higher rates to continue for some time until we see a moderation in credit growth,” Reddy said.

Singh of CSB Bank said the trend of large CD issuances will continue as this is the only instrument that moves money from mutual funds to banks in the form of stable deposits.