Banks raise certificate of deposits to tide over liquidity shortage

Banks are raising certificate of deposits (CDs) to meet their credit requirement amid a cash crunch situation. A few banks have raised over Rs 5,000 crore through this route since September, say market participants.

The country's largest commercial bank, State Bank of India (SBI) and its associates, raised one-year money at 7 per cent through on-tap CDs.

This is two percentage points higher than the cost of one-year deposits, which is now pegged at around 5 per cent. Six of the seven associate banks of SBI have already raised CDs worth about Rs 2,500 crore to meet their cash requirements. Besides, SBI itself is in the market raising resources.

A dealer said, "SBI is likely to continue raising funds through on-tap CDs till the IMDs are redeemed. However, SBI associates are now paying about 7 per cent for one-year money as liquidity has tightened."

About a fortnight back, SBI had raised one-year money at 6.13 per cent. This is one percentage point higher than the rate of one-year treasury bill. State-owned Allahabad Bank too raised up to Rs 4,000 crore (up from Rs 2,000 crore) of maturity up to one year.

Consequently, the interest rate on CDs has shot up by over 50 basis points since November 11, when the first MSS auction was cancelled. The cost of one-year CD is now 7 per cent, one full percentage point higher than the yield of 364-day treasury bill.

The difference between the rates of one year CD and T-bill was 30-40 basis points two months back. One basis point is one hundredth of a percentage point.

This is marginally cheaper than the bulk deposit which now costs around 7.25 per cent for one year deposits. Mutual funds are aggressively subscribing to CDs, which are a tradable instrument, say dealers.

CDs are short- and medium-term debt instruments offered by banks. They are issued for a period of not less than seven days and not exceeding one year from the date of issue.