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Informist, Tuesday, Sep 10, 2024

 

By Richard Fargose

 

MUMBAI – Issuances of certificates of deposit surged 43% on year in August as banks tapped this route to meet their funding requirements to cope with the imbalance between credit and deposit growth. Fundraising through certificates of deposit also rose 22% on month to 820.20 bln rupees in August as state-owned banks continued to borrow funds via CDs despite comfortable liquidity conditions for most part of the month, market participants said. Public-sector banks accounted for nearly 64% of the CD issuances last month.

 

"They (Reserve Bank of India) are warning about credit-deposit growth mismatch, but as a commercial entity, we can’t really let our business slow down," said the treasury head at a large state-owned bank. "We have to find ways to fund our loan book, and hence banks are tapping all possible avenues like the CD market for short-term needs and infra bonds for long-term loans."

 

In the past few months, top RBI officials have on multiple occasions warned that India's banking sector could face significant liquidity risks owing to the widening credit-deposit gap. With credit growth outpacing deposit growth, most banks have raised their deposit rates amid rising competition and are increasingly relying on bulk term deposits and CDs to fund asset growth.

 

As per the latest available data, banks' loan book growth remained higher than that of deposits. Bank deposits grew 10.8% on year to 213.24 trln rupees as of Aug 23, compared with loan book growth of 13.6% on year.

 

CD issuances in August were almost 25% higher than the sum due for maturity in the month, mirroring the trend observed in the preceding month. In July, banks issued CDs worth 671.60 bln rupees, against maturity of 461.60 bln rupees.

 

Punjab National Bank was the largest issuer of CDs in August, raising 168 bln rupees against redemption of 68.50 bln rupees, followed by Bank of Baroda, which raised 114.50 bln rupees, and Canara Bank, which borrowed 78.75 bln rupees. Among private-sector banks, HDFC Bank was the top issuer, raising 92.05 bln rupees. IndusInd Bank raised 40 bln rupees through CDs.

 

As per data from the RBI, the total outstanding CD amount of all banks stood at 4.47 trln rupees as of Aug 23, almost 50% higher than the 3.01 trln rupees outstanding a year ago.

 

Despite the liquidity surplus topping the 1-trln-rupee mark in most of August, rates on CDs rose around 10 basis points due to rising issuances. "Although it may look like (CD) rates have risen 10 bps, but considering the moderation in T-bill cutoffs, the actual rise is around 15 bps," said a treasury head with a big state-owned bank.

 

After briefly easing to 7.05-7.10% during the month, CD rates ended August at 7.20-7.25%, against 7.10-7.15% a month ago.

 

Going forward, market participants expect the momentum in CD issuances to continue in September due to firm credit growth and fresh funding needs for the festive season.

 

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Funds raised through the issuance of commercial paper rose to 1.41 trln rupees in August, 35% up on year and 22% higher from a month ago, mainly due to higher borrowing by manufacturing companies, which accounted for nearly 43% of the total quantum. Manufacturing companies raised 612.05 bln rupees in August, up 52% on year and 31% on month. Fundraising by non-banking finance companies rose 32% on year and 24% on month to 751.16 bln rupees.

 

"CP issuance from NBFCs is rising mainly due to strong credit growth," said Pankaj Pathak, fund manager-fixed income, at Quantum Asset Management Co, "whereas manufacturing companies are borrowing via this route more as bank loans are getting costlier."

 

Most banks have been raising the marginal cost of funds-based lending rates to protect their net interest margins as they are pushed to offer higher interest rates on deposits to garner more funds. The country’s largest lender, State Bank of India, has raised its MCLR by 10-20 bps across tenures in the past two months, as per data on the bank's website.

 

By the end of August, rates on three-month CP issued by non-bank lenders eased to 7.60-7.70% from 7.70-7.80% a month ago, while those on CP of similar maturity issued by manufacturing companies rose to 7.25-7.35% from 7.15-7.25%.

 

Industry players said that despite the rise in issuances, rates on CP issued by non-banking finance companies cooled as issuances of such instruments during the month were 13% lower than the redemption amount. National Bank for Agriculture and Rural Development, the biggest issuer, raised 97 bln rupees in August, against 234 bln rupees worth of maturity faced by it.

 

An official with NABARD said the lower borrowing was on account of a narrower cash flow gap.

 

Reliance Industries Ltd and Reliance Jio Infocomm Ltd raised 70 bln rupees and 58.25 bln rupees respectively, in August. Larsen & Tourbo Ltd raised 40.10 bln rupees against maturity of 38.50 bln rupees.

 

Last month, CP worth 1.29 trln rupees came up for redemption compared with 689.55 bln rupees in July, according to data compiled by Informist. Of the total CP scheduled for redemption last month, paper worth 889.19 bln rupees were rolled over. Manufacturing companies issued CP worth 612.05 bln rupees, against maturity of 349.83 bln rupees.

 

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

CP	Aug-24	Jul-24	on-month (%)	Aug-23	on-year (%)
Manufacturing companies	612.05	403.10	51.84	469.02	30.50
Non-banking finance companies	751.16	568.44	32.14	607.52	23.64
Housing finance companies	48.00	74.15	(-)35.27	79.50	(-)39.62
Total	1,411.21	1,045.69	34.95	1,156.04	22.07
CDs	Aug-24	Jul-24	on-month (%)	Aug-23	on-year (%)
State-owned banks	523.25	408.50	28.09	322.25	62.37
Private banks	296.95	263.10	12.87	251.45	18.10
Total	820.20	671.60	22.13	573.70	42.97

 

End

 

Edited by Rajeev Pai

 

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