Banks get aggressive on raising funds via CDs

Banks rush to raise funds via CDs
Banks rush to raise funds via CDs

by 5paisa Research Team Last Updated: Dec 15, 2022 - 12:17 pm 18.6k Views
Listen icon

Amidst rising repo rates, Indian banks appear to have discovered a new mode of raising funds from the market. They are raising funds aggressively through certificates of Deposits (CD), which is a short term fund raising method for banks. These CDs are typically a money market instrument and have a maturity ranging from a few days to as long as 1 year. In the last few months, there has been a perceptible increase in the fund raising activity of banks through the issuance of certificates of deposits, as other options have been contracting.


Amidst rising bond  yields and repo rates, most banks will have to hike the deposit rates offered. However, that would hike their cost of funds and narrow their net interest margins (NIMs). The other option is to raise funds through CDs, which offers short term funds at extremely competitive rates. You just need to look at the numbers to get a clearer picture. For instance, if you just take the first 20 days of August 2022, PSU and private banks raised close to Rs30,000 crore through the issue of CDs, a record of sorts. 


It is not just the small and mid-sized banks that are finding CDs a more profitable and attractive alternative. Even large PSU banks like Punjab National Bank and Bank of Baroda are finding the CD route more lucrative. The reasons are not hard to seek. The cost of raising funds via CDS for a one year tenure ranges between 6.60% and 6.74%, and it is getting increasingly difficult to source deposits at these rates. This at least allows them to tie up funds for one year and give them a cushion in case RBI decides to tighten for longer period. 


The current rate of CDs is just about 120 bps above the repo rate of the RBI, which has bene enhanced to 5.40% in the August policy. That is an attractive spread. There is one more reason for this surge in CD demand by banks. Thanks to the persistent tightening via rate hikes, CRR hike and the VRRRs, the banking system liquidity surplus has dropped below Rs100,000 crore. This sudden and sharp fall in liquidity is also pushing the banks more towards the CD route and this phenomenon is likely to continue through 2022.


If supply is one side of the story, there is also substantial appetite for the CDs issued by Indian banks Most of the debt funds have a lot of short term money at their disposal and bank CDs fit perfectly into their portfolio choice. Most of the fund managers are keen to park their surplus funds in bank CDs. This robust demand and supply ensures that the interest in CDs work both ways. The demand and the supply side of CDs are working in favour. More so, since MPC has indicated that the rate hikes may have more legs to it.

Share Market Today


How do you rate this article?

or

Start Investing in 5 mins*

Rs. 20 Flat Per Order | 0% Brokerage

378X91-D3

About the Author

Our research team is composed of some highly qualified research professionals, their expertise range across sectors.

Disclaimer

Investment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.
Open Free Demat Account
Resend OTP
Please Enter OTP
Mobile No. belongs to

By proceeding, you agree to the T&C.

Latest News
What you must know about Marinetrans India IPO?

Net Marinetrans India Ltd was incorporated in the year 2004 and it is engaged in the business of sea freight forwarding. Marinetrans India Ltd started off as a freight forwarder and later expanded to offer Door-to-Door Delivery and 3PL services for the logistics industry.

Net Avenue Technologies IPO GMP (Grey Market Premium)

Net Avenue Technologies IPO opens for subscription on 30th November 2023 and closes for subscription on 04th December 2023.

Warren Buffett Offloads Entire 2.46% Paytm Stake, Faces ₹507 Crore Loss

On November 28, 2023, shares of One 97 Communications, the parent company of Paytm, opened 1% lower following Warren Buffett's move to sell his entire stake in the digital payment giant.