Banks offer over 3-year high interest rate to raise funds through CDs

Call mkt rates at higher end of rate corridor as liquidity shrinks rapidly

Commercial banks are offering the highest interest rate in three and a half years to raise deposits from the market amid a nine-year high credit growth, a shrinking pool of surplus funds, and a series of aggressive rate hikes by the Reserve Bank of India (RBI). 

Rates on the three-month certificates of deposit (CDs) issued by public sector banks to raise funds have surged 58 basis points (bps) since September 30, when the RBI last raised interest rates, the Bloomberg data showed.

The three-month CD rates stood at 6.88 per cent as of Tuesday – their highest levels since April 2019, treasury officials said. The rise in the CD rates has been particularly stark since September (the three-month rate has risen 103 bps since then) as liquidity in the banking system has shrunk rapidly.

With demand for loans showing firm momentum, banks have been feeling the pressure when it comes to mobilising funds to finance the credit growth. Bank credit growth was at 16.4 per cent year-on-year for the fortnight ended September 23, while deposit growth was at 9.2 per cent in this period, according to the latest RBI data.

“Basically, it depends on the credit-deposit ratio of each bank. What we have seen in this year is that the advances have grown much faster than the deposits. For some banks, that has forced them to access the CD market for raising funds,” Soma Sankara Prasad, managing director (MD) and chief executive officer (CEO), UCO Bank, told Business Standard.

“As far as UCO Bank is concerned, our liquidity position is quite comfortable at the moment. Of course, our advances are also growing much faster than deposits, but we have surplus SLR (statutory liquidity ratio), which we can utilise for borrowing from the RBI. Though we have also slightly increased our deposit rates, right now our position is much more comfortable,” he said.

Pralay Mondal, MD and CEO of CSB Bank, said: “The overall demand for deposits will remain now as corporate investments have not picked up yet. Government spending should create some systemic liquidity, but sustained credit growth, as expected now, will continue to keep the deposit and CD rates at current levels.” 

While lenders have been much slower to pass on the RBI’s rate hikes to deposit rates, the pace has increased since mid-August.

The abrupt hardening of CD rates is attributable to the sharp decline in surplus liquidity in the banking system. From a surplus of around Rs 8 trillion in early April, the surplus has declined to around Rs 64,000 crore now, the RBI data showed. In September, the average liquidity surplus was around Rs 91,000 crore.

“There is definitely pressure on banks when it comes to mobilising funds because we have seen that firstly the government’s borrowing is going on track. Secondly, credit growth has picked up, and thirdly, there have not been any specific measures which the RBI had announced in the policy for augmenting liquidity,” Madan Sabnavis, chief economist, Bank of Baroda, said.

Since late September, the RBI has offered only one repo window for banks to borrow funds from.

“The tighter liquidity ideally gets reflected in terms of interest rates. More at the shorter-end to begin with,” Sabnavis said.

Since late September, there have been numerous instances of the RBI injecting funds into the banking system as liquidity has slipped into deficit. So far in October, banks have borrowed funds from the RBI at the MSF rate of 6.15 per cent four times, with the average borrowing at around Rs 7,000 crore.

The weighted average call rate, which is the operating target of the RBI’s monetary policy, has ended above the repo rate of 5.90 per cent on six of the 12 trading days so far in October, implying that effective policy tightening has outstripped the central bank’s actions.

“If the system liquidity doesn’t improve, the deposit rates could go up further because the narrowing of liquidity will continue,” said Soumyajit Niyogi, director, India Ratings & Research.