By Dharamraj Dhutia
MUMBAI (Reuters) – Indian banks will continue to rely on certificates of deposit for meeting short-term cash needs in the next quarter amid tight liquidity conditions, after fundraising through these instruments rose 50% year-on-year in 2024.
Certificates of deposit (CDs) are debt instruments with maturities of less than one year issued by banks, and are efficient tools for short-term funding.
WHY IT’S IMPORTANT
Fundraising through CDs has become crucial for banks as deposit mobilisation has slowed, with several lenders lowering their deposit growth forecasts.
Rising competition for so-called bulk deposits has also pushed more lenders towards CDs.
Credit growth has outpaced deposit growth for most of the last three years, which could lead to an asset-liability mismatch, forcing banks to issue more CDs.
BY THE NUMBERS
Banks issued CDs worth 12.23 trillion rupees ($142.85 billion) in 2024 till Dec. 27, data from information provider Prime Database showed.
The issuance is about 50% higher than in 2023, and over 80% higher versus 2022.
Average banking system liquidity turned to neutral in 2024, as the central bank focused on inflation management and kept a tight leash on cash conditions. Average liquidity was in surplus during the previous two years.
GRAPHIC
KEY QUOTES
The increase in CD issuances is primarily driven by the ongoing liquidity tightness… Banks are rolling over CDs to manage redemption pressures and also leveraging them as a quicker funding tool to supplement deposit growth for supporting economic expansion. If liquidity deficit persists, it may elevate CD yields further,” said Venkatakrishnan Srinivasan, founder and managing partner at debt advisory firm Rockfort Fincap.The reliance on CDs may continue in the last quarter of the fiscal year, as liquidity is expected to be tighter due to factors such as increased lending, asset-liability mismatches and higher statutory outflows, said Mataprasad Pandey, vice president at financial advisory firm Arete Capital.
($1 = 85.6125 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Mrigank Dhaniwala)
