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Informist, Monday, Nov. 11, 2024

 

By Vidhushi RajPurohit

 

MUMBAI – High surplus liquidity in the banking system and low repayments in October led to moderation in the issuance of certificates of deposit last month, market participants said. CDs redeemed in October totalled INR 649.8 billion. Against this, banks issued CDs worth INR 609.95 billion. The amount issued was down almost 58.0% on month, but year-on-year it was up 5.7%.

 

State-owned banks had the bigger share at INR 399.4 billion, accounting for 65.5% of the total issuances. The remaining INR 210.55 billion worth of issuances were by private banks. On a net basis, public-sector banks redeemed CDs worth INR 314.15 billion while private banks borrowed INR 68 billion.

 

The need for funds was low as surplus liquidity in the banking system remained at a comfortable INR 1.50 trillion or higher for 19 days in October. The surplus reached as high as INR 2.88 trillion on Oct. 3, the most since July 2022. "The liquidity was in a high surplus and, besides that, banks' credit offtake has been reduced as banks try to minimise their exposure to unsecured lending as per the RBI's guidelines," Himanshu Pathak, senior manager at the treasury desk with Federal Bank, said. 

 

According to data released by the RBI, the on-year growth in banks' outstanding deposits as of Oct. 18 outpaced the loan book growth for the first time since April 2022. Indian banks' loan book grew 11.5% on year to INR 172.38 trillion as of Oct. 18, while deposits rose 11.7% to INR 218.08 trillion. "When the credit side shrinks, it reduces the need for banks to borrow bulk sum from the market," Pathak said.

 

In September, the issuances of CDs by banks surged to INR 1.45 trillion because of high credit-deposit ratio and quarter-end funding needs. "Banks' need for CD issuances is majorly led by either rollover demand or, as has been the case for the past few months, to maintain a healthy credit-deposit ratio," a senior treasury manager with a private bank said. Funds raised through CDs are reported under aggregate deposits, which helps banks to narrow the gap between deposit and credit growth. In October, lack of requirement for funds at the start of the quarter also led to reduced issuances.

 

Most issuances last month were in the three-month segment, as banks issued CDs due for maturity in January. "There are two main reasons for the issuers to prefer the three-month tenure," a general manager, treasury, with a state-owned bank said. "Firstly, mutual funds are the most liquid in that tenure, thus banks get better rates." Secondly, the rate-cut scenario which has built after the US Federal Reserve slashed its policy rates has kept issuances from spilling to longer tenures, the general manager added.

 

As issuances were down from September, rates also eased. The rates on CDs issued in the three-month segment ended at 7.15%-7.20%, down 5 basis points from 7.20%-7.25% on month.

 

Going forward, market participants expect the issuance of CDs to pick up in December, when banks might tap the short-term debt market to refinance their maturing papers, dealers said. So far, the redemption amount due for December is at INR 1.47 trillion. For November, the consensus in the market is that the issuances might remain at the same moderate level considering the low redemption amount and the easing credit-deposit ratio. So far, for November, the amount due for redemption is INR 629.45 billion. 

 

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Issuances of commercial paper surpassed the repayment amount as issuers tapped the market to meet funding requirements for the festival month, dealers said. "There were festive needs, and the other reason was the bonds maturing in the month, which companies financed through CP issuances," Sumantra Banerjee, senior associate with NVS Brokerage Firm, said. 

 

The total CP issued in October amounted to INR 1.11 trillion, against the redemption amount of INR 659.14 billion. The issuances were up 48.2% on year. However, owing to a high base effect, they were down 12.9% from September. "It is usual for issuances to be up in September, as it is the quarter-end period," a fixed income fund manager with a mutual fund said. "But, for October, the issuances were driven by the shift of manufacturing companies' borrowing route from banks to CP."

 

Market participants said that as the funding cost for companies increases by borrowing via banks, more companies are tapping the CP route, which gives them a cheaper avenue to raise funds. Indian banks in the past few months have raised the marginal cost of funds-based lending rates to protect their net interest margins as they are required to offer higher interest rates on deposits to garner more funds. The country’s largest lender, State Bank of India, raised its MCLR by 10 basis points across tenures from Aug. 22. 

 

Manufacturing companies, which mostly stayed on the sidelines in September, actively issued CP in October, accounting for nearly 53% of the total issuances at INR 573 billion, up 53.1% on month and over a whopping 250.0% on year. "It was the pent-up demand from these companies because in previous months they were relatively inactive in the CP market," a fixed income fund manager with a mutual fund said. In September, the share of issuances by manufacturing companies in the total CP raised was just under 30.0% at INR 374.37 billion, declining 38.8% on month.     

 

Participation by non-banking finance companies moderated. Their issuances were largely driven by their redemption needs. The amount mopped up by non-bank lenders last month was INR 459.03 billion, 20.4% higher than the maturing sum of INR 381.14 billion. On year, issuances fell 15.7%, while the fall was 45.5% on month.

 

Bharti Telecom was the largest issuer, borrowing INR 95.25 billion. The other big issuers were Reliance Retail Ventures and L&T Finance, raising INR 60.00 billion and INR 50.65 billion, respectively.

 

Rates on CP eased in October owing to the low redemption pressures on mutual funds and comfortable liquidity in the banking system. "The issuances were easily taken up by mutual funds as the overall size of investments by their side has also widened," Banerjee said. Rates on three-month CP issued by non-banking finance companies were at 7.45-7.50% by the end of October, down 10 basis points from 7.55-7.60% at September-end. Rates on CP of similar maturity issued by manufacturing companies were at 7.20-7.25%, five basis points lower than 7.25-7.30% in the previous month.

 

Following are details of CP and CDs issued in October as per data sourced from the Clearing Corp. of India and compiled by Informist. Amounts in INR billion:

 

CD	Oct. 2024	Sept. 2024	on month %	Oct. 2023	on year %
State-owned banks	399.40	1052.90	-62.07	358.50	11.41
Private banks	210.55	396.75	-46.93	218.71	-3.73
Total	609.95	1449.65	-57.92	577.21	5.67
CP	Oct. 2024	Sept. 2024	on month %	Oct. 2023	on year %
Manufacturing companies	573.25	374.37	53.12	161.83	254.23
Non-banking finance companies	459.03	842.76	-45.53	544.70	-15.73
Housing finance companies	73.00	51.53	41.67	39.25	85.99
Total	1,105.28	1,268.66	-12.88	745.78	48.20

 

End

 

Edited by Rajeev Pai

 

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