Surge in bank credit offtake leads to three-fold jump in CD issuance

Meanwhile, issuance of commercial papers---securities sold by companies to raise funds--dropped sharply to Rs 12.5 trn in FY23 (up to Feb 28) from Rs 19 trn over the same period last year

In a reflection of the huge increase in banks’ demand for funds on account of booming credit offtake, issuances of certificates of deposits (CDs) have surged by more than three times so far this financial year, Reserve Bank of India data showed.

“In the primary market, fund mobilisation through CD issuances was robust at Rs 6.3 trillion during the financial year so far (up to March 10), higher than Rs 2 trillion in the corresponding period last year reflecting banks’ additional demand for funds on account of buoyant credit offtake,” RBI staff wrote in the central bank’s March 2023 Bulletin.

Meanwhile, issuance of commercial papers (CP), which are securities sold by companies to raise funds, dropped sharply to Rs 12.5 trillion during the financial year so far up to February 28 from Rs 19 trillion over the same period last year, the RBI staff wrote. The reduction was on account of CP issuances as a fund-raising route being displaced by bank credit offtake, they wrote.

Momentum in bank credit growth started to gather pace from the second half of the previous financial year as the progressive re-opening of the economy after Covid restrictions led to demand for loans. From April 2022 onwards the growth in credit started to outstrip that in deposits, exerting pressure on banks to mobilise funds to finance the demand for loans.

As on February 24, year-on-year growth in credit was at 15.5 per cent, while deposit growth lagged behind at 10.1 per cent, latest Reserve Bank of India data showed.

“A part of the funding gap has been met by mobilisation of Certificates of Deposits (CDs). Banks are keeping their CD issuance elevated to meet short-term requirements amid lower liquidity and focusing on shoring up the deposits to meet robust credit demand,” analysts from Care Edge Ratings wrote in March 14 note.

“The outstanding CDs stood at Rs 2.8 trillion as of February 24, 2023, as compared to Rs 1.3 trillion a year ago,” they wrote.

Banks have also been managing the funding gap by drawing down surplus cash parked with at the RBI’s Standing Deposit Facility and reverse repo windows, analysts said.

“The drawdown in reverse repo was to the tune of Rs 5 trillion between March 2022 and January 2023 and incremental CDs raised by banks between March 2022 and January 2023 amounted to Rs 1.5 trillion,” analysts at India Ratings & Research wrote last week.

Tighter liquidity conditions in the banking system have also contributed to the increase in  issuance of CDs while market rates on these short-term debt instruments have climbed, making it more expensive for banks to raise funds.

According to the RBI staff, from February 16 to March 15, 2023, rates across the term money segment have hardened with rates on CDs and CPs for NBFCs trading above the central bank’s Marginal Standing Facility rate. The MSF rate, which is currently at 6.75 per cent, is the upper band of the interest rate corridor.

The RBI has been withdrawing monetary accommodation since April 2022 to combat high inflation. From around Rs 7.4 trillion in April 2022, liquidity surplus in the banking system shrunk to Rs 1.6 trillion in December-January.

In March, liquidity has tightened significantly due to year-end tax outflows as well as redemptions of pandemic-era repo operations carried out by the RBI.

The RBI has injected funds into the banking system on each of the last six working days, with the daily average infusion at Rs 93,015.72 crore.

Rise Shows Demand for Funds

> CD issuances this FY (till March 10) stood at Rs 6.3 trn compared to Rs 2 trn last FY

> Surge in CD sales shows bank demand for funds amid credit growth

> With larger supply, CD rates trading above RBI's MSF rate

> Tighter liquidity driving banks' demand for funds

> Banks' cost of funds rises as money market rates jump