CD issuances set for further boost, rates seen rising

With the onset of the festive season, you probably plan to approach a bank for a loan to buy a new home, car or to make an investment.

But, banks themselves do not have much surplus funds left, due largely to the liquidity-tightening measures put in place by the Reserve Bank of India of late, and need to borrow through short-term instruments such as certificates of deposit (CDs) to be able to meet your loan requirement.

This, in turn, is expected to push up the CD rates going forward during the third quarter, easily the busiest quarter for banks in view of the festive demand.

A CD is a time deposit with a bank and is generally issued by commercial banks, but it can also be bought through brokerages.

It bears a specific maturity date, a specified interest rate and can be issued in any denomination, much like bonds.

“During Q3, only to maintain their present levels of time deposit, we anticipate a flurry of supply in short-term Non-SLR (statutory liquidity ratio) debt, banks are expected to mop up at least Rs2.25-2.50 lakh crore through CD issuance,” Rahul Chokshi and Chirag Kabra of Altius Finserv wrote in a report on Thursday.

CD rates have already shot up by 200-300 basis points across different maturities so far this fiscal. “With more CD issuances from banks,expect the rates to go up by another 10-15 basis points in the near future,” said Sandeep Mahajan, head of debt and capital market, RR Investors
Capital Services.

Analysts feel banks with lower dependence on bulk deposits and higher proportion of current account and savings account deposits are better placed in such a situation.

“Deposit mobilisation is turning out to be the foremost challenge, due to which we have seen rates inch up gradually. Interest rates for bulk deposits (wholesale) have already gone up by 150-200 basis points.

In such a scenario, we are positive on banks with low dependence on bulk deposits and higher current account savings account proportion,” Kajal Gandhi, Viraj Gandhi and Mani Arora of
ICICI Securities wrote in a report
released on Wednesday.

According to the latest weekly statistical supplement issued by the RBI, the total outstanding amount in CDs in the fortnight ended August 13 stood at Rs3,27,582 crore with Rs14,058 crore being issued during the fortnight.

Credit growth as well as deposit growth has been sluggish in the second quarter of the current fiscal.

Deposits grew at 14.78% while credit grew at 19.76% as on September 10, 2010 compared with the same period last year.