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Informist, Tuesday, Oct. 8, 2024

 

By Richard Fargose and Vidhushi RajPurohit

 

MUMBAI – Issuances of certificates of deposits surged last month as banks tapped the short-term debt market to raise funds to bridge the gap between deposit and credit growth, market participants said. The issuances also gathered pace due to the cyclical rise in credit disbursement towards the end of the September quarter. Total INR 1.45 trillion was raised through CD issuances in September, almost 97% higher from last year and 76.7% from the previous month.

 

The gap between deposit-credit growth has been a major concern for the Reserve Bank of India and it has flagged the issue on several occasions, urging banks to mobilise deposits and go easy on advances. The reluctance of banks to raise interest rates on retail deposits is one of the major reasons cited by market participants for the shortfall in deposit growth. Although the latest data shows a slight improvement, the gap between deposit and credit growth is still high. Bank deposits grew 11.5% on year as on Sept. 20, up from 10.8% as of Aug. 23. On the other hand, bank loans grew 13.0% on year as on Sept. 20, compared with 13.6% as on Aug. 23.

 

Market participants said the surge in CD issuances in September has helped narrow the gap between deposit and credit growth as funds raised through CDs are reported under aggregate deposits. Last week, rating agency ICRA said banks will continue to issue CDs to meet credit demand even as they struggle to raise fresh deposits as credit growth remains robust. "Even if the gap narrows, banks will continue to tap the CD market to maintain a healthy deposit growth," said a senior official with a big private bank. "Without CD issuances, they will be back to square one and no bank wants that."

 

Public sector banks surpassed private banks in issuing short-term papers in September as they raised INR 1.05 trillion, higher by almost 113% from last year and 101% from the previous month. Private sector banks issued CDs amounting to INR 397 billion, an increase of nearly 63% on year. "Public banks have been struggling more than the private banks to garner deposits," a general manager at the treasury desk with another private bank said. "Hence, the issuance by public banks has been greater than that of private banks."

 

Amongst state-owned banks, Canara Bank was the largest issuer last month. The bank raised INR 282 billion, against INR 148 billion of papers due to mature in September. Punjab National Bank and State Bank of India were the other big issuers, raising INR 157.40 billion and INR 154.60 billion, respectively. Bank of Baroda and Union Bank of India were also active in the CD market in September. They raised INR 151.00 billion and INR 145.00 billion, respectively.

 

Most of the CDs issued were of three-month maturity. "The demand was higher in the three-month segment from the mutual fund side," Himanshu Pathak, senior manager at the treasury desk with Federal Bank, said. "The issuances from banks gravitate according to the demand side pull as it provides better rates."

 

Market participants believe the high demand in the three-month category is mostly due to expectations of a rate cut by the Reserve Bank of India at its policy review in December. In its September meeting, the US Federal Open Market Committee slashed policy rates by 50 basis points to the range of 4.75-5.00%. Market expects the RBI will also follow suit and may cut policy rates in December.

 

The CD issuances in September were well above the refinancing needs of banks, as the overall CD issuances were 32.6% higher than amount due to mature in the month. According to market participants, despite the rise in issuances, rates on CDs remained largely steady due to comfortable liquidity conditions in the banking system. 

 

Liquidity in the banking system remained in surplus in September, barring a few days when there were outflows due to quarterly advance corporate tax payment and monthly goods and service tax payments. The average daily net liquidity adjustment facility balance remained above INR 1.5 trillion surplus during September.

 

Despite the surge in issuances, CD rates eased towards the end of September. After rising to 7.30-7.35% during the month, CD rates ended at 7.20-7.25%, unchanged from a month ago, according to data.

 

"It is a usual trend observed during the quarter-end that at the start of the month the money market rates rise but towards the end--the month-end inflows ease the demand and then the rates also ease," said Pankaj Pathak, fund manager-fixed income, at Quantum Asset Management Co.

 

Market participants expect CD issuances to remain high in the upcoming months as well, because the gap in the credit and deposit growth still persists, but the amount will likely be lower than what it was in September.

 

COMMERCIAL PAPERS

Funds raised by companies through commercial papers increased 13.2% on year to INR 1.27 trillion in September. The share of non-banking finance companies in the total amount raised was 66.43% compared with 13.8% last year. They borrowed INR 843 billion in September. The share of manufacturing companies in the total amount was 29.5%, as they raised INR 374.37 billion. Issuances by manufacturing companies rose 12.4% on year but declined 38.8% on month. In August, manufacturing companies had raised INR 612.05 billion. 

Export and Import Bank of India was the biggest issuer as it raised INR 123 billion, against its repayments worth INR 75 billion for September. Other major NBFC issuers included Small Industries Development Bank of India, ICIC Securities, HDFC Securities, and Kotak Securities.

 

The total CP issuances in September were lower than in August, mostly due to less number of issuances by manufacturing companies. Market participants attributed this to manufacturing companies opting for other funding avenues.

 

"Fall in CP issuances was a bit of a surprise and difficult to ascertain the exact reason for the same, but, it was an overall broad-based slowdown in the incremental credit demand from the companies' side," said Pathak. "In the coming months, there will be some moderation compared to the last year, but the demand will certainly pick up, but companies have a choice of whether to tap CP route or to raise their funds by opting for corporate loans via banks."

 

Total papers issued in September totalled INR 1.27 trillion, 36.7% lower than the redemption amount. The rates on three-month CPs issued by manufacturing companies were 7.25-7.30%, while the rates of papers of similar maturity issued by non-banking financial companies were 7.55-7.60%.

 

Details of CP and CDs issued in September, as per data sourced from Clearing Corp. of India and compiled by Informist (all figures, except percentages, in billion rupees):

 

CD	Sept. 2024	Aug. 2024	on month %	Sept. 2023	on year %
State-owned banks	1052.9	523.25	101.22	495.00	112.71
Private banks	396.75	296.95	33.61	243.52	62.92
Total	1449.65	820.20	76.74	738.52	96.29
CPs	Sept. 2024	Aug. 2024	on month %	Sept. 2023	on year %
Manufacturing companies	374.37	612.05	-38.83	333.12	12.38
Non-banking finance companies	842.76	751.16	12.19	740.48	13.81
Housing finance companies	51.53	48.00	7.35	47.20	9.17
Total	1,268.66	1,411.21	-10.10	1,120.80	13.19

 

End

 

Edited by Ashish Shirke

 

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