The certificates of deposit (CD) market has sprung to life following the Reserve Bank of India’s (RBI’s) unscheduled monetary policy last Friday, after being almost dormant for nearly a month.
Treasury heads say private banks are floating CDs of nearly Rs 5,000- 8,000 crore a day since the RBI lowered the repo and reverse repo rate last week, with these issuances being bought by public sector banks (PSBs), though at high rates.
While part of the issuance is to capitalise on the RBI’s rate action, CD issuances have become imperative for some private lenders such as IndusInd Bank and RBL Bank, which have seen a sudden drop in deposits over the past few weeks.
IndusInd Bank has witnessed a 10-11 per cent fall in deposits of late, while the number stood at about 8 per cent for RBL Bank.
Both banks have clarified that these withdrawals pertain to government deposits and certain bulk deposits. For government entities, the first five and the last five days of a month are considered extremely critical to manage cash outflows.
“There will be large expenses to meet and for operational ease, some government bodies have withdrawn their deposits in private banks and moved it to PSBs, with whom they have longstanding relationships,” said a banker.
There had been resistance within state government bodies to park their deposits with private lenders following the YES Bank fiasco, and it is believed that during the lockdown, their preference for PSBs has only increased, given their working relationship.
Analysts say that over the last 10 days, the amount of deposits withdrawn from private banks could range between Rs 27,000 crore and Rs 30,000 crore, with a significant portion being from IndusInd Bank and RBL Bank. “These are not premature rundowns on deposits, and this business may return to us in some time,” said a senior executive at a private lender.
Meanwhile, private lenders are getting a helping hand from PSBs, which are actively subscribing to CDs issued by them. “All large PSBs have subscribed to CDs floated by private banks,” Rajkiran Rai G, MD and CEO of Union Bank of India, told Business Standard.
“One who has surplus funds will give money to the one who needs it, after due diligence,” he affirmed.
However, another head of a PSB has called the situation a temporary liquidity crunch, which should stabilise in 6-9 months. Despite the flush of liquidity since March 27, it is believed that CD rates haven’t normalised.
While rates have partially cooled off to 6.0-7.5 per cent, from 8 per cent-plus in early March, experts say this is still at a premium to the usual CD rates of 5.5-6 per cent.
Some private banks are believed to have raised CDs at 7.5 per cent in the past few days.
YES Bank recently floated CDs for 8.25 per cent. Another private lender, which is extremely squeezed for near-term liquidity, is said to have raised CDs at 8 per cent. Experts say rates may remain high for another quarter, considering risk-aversion hasn’t subsided much.