Tight liquidity in the banking system has forced many banks and companies to tap the short-term debt market for raising funds, according to a Moneycontrol analysis.
Outstanding certificates of deposit (CDs) and commercial papers (CPs) rose sharply on a yearly basis in November 2023 due to tight liquidity conditions, and the lack of bank funding for a few non-banking finance companies (NBFCs), after the Reserve Bank of India (RBI) increased risk weights on unsecured lending, and cash demand during the festive season, experts said.
A CD is a short-term debt instrument used by banks to garner funds. A CP, on the other hand, is an unsecured money market instrument issued in the form of a promissory note by corporate borrowers to diversify their sources of short-term borrowings and provide an additional instrument to investors.
According to National Securities Depository Ltd (NSDL) data, outstanding CDs rose around 18 percent on-year in November, and CPs rose 10 percent on-year.
“Continuing system liquidity deficit and credit off-take pushed banks and corporates to look for additional liquidity. These entities raise additional funds through the money market when liquidity deficit widens, especially during periods of advanced tax outflows, GST payments and large IPO funding,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.
Additionally, V Ramachandra Reddy, DGM, Head, Treasury, Karur Vysya Bank, said banks are competing to augment their CASA portfolio, which is relatively more stable and cost-effective.
In this backdrop, to meet credit demand, they are constrained to lean on term deposits, and more so on wholesale deposits or CD streams.
Further, Reddy said that post the tightening of capital norms, NBFCs are preferring CPs over short-term bank loans, leading to a narrowing of spreads between the two.
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What NSDL data says
According to NSDL data, as on November 30, 2023, CDs worth Rs 3.81 lakh crore were outstanding, compared to Rs 3.25 lakh crore, as on November 30, 2022.
Similarly, CPs worth Rs 3.94 lakh crore were outstanding as on November 30, 2023, compared to Rs 3.59 lakh crore, as on November 30, 2022.
Of the total CD amount, Rs 63,342 crore is set to mature in January 2024, Rs 92,426 crore in February 2024, and Rs 65,640 crore in March 2024.
CPs worth Rs 68,843 crore is set to mature in January 2024, Rs 92,172 crore in February 2024, and Rs 43,726 crore in March 2024.
Expected growth in CD, CP issuance
Money market experts believe that there could be some rise in the issuances of CDs and CPs the coming month.
This is because of the evolving liquidity situation, credit off-take, interest rate movements, investor preference, government spending and policy initiatives, year-end pressure, among others, experts said.
Adding to this, Reddy said that the clamour for deposits will continue in the next quarter, since it is a busy season for credit and it will see moderation from April onwards.
“Analysing the current market conditions and evolving liquidity situation, we do expect these entities to continue tapping the money market and they may end up raising funds 15 percent to 20 percent higher, compared to previous fiscal,” Srinivasan added.
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Yield outlook
The yield on CDs and CPs is expected to increase in the coming days due to the quarter-end and tight liquidity conditions in the banking system.
Currently, liquidity in the banking system is expected to be in a deficit of around Rs 2.59 lakh crore.
“Being quarter-end, we may see another 5-10 basis point increase in yield. This will be linked to the amount of variable rate repo (VRR) that may be further announced,” said Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house.
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