With a slowdown in bank credit off take, on the one hand, and being stuck with high-cost bulk corporate deposits, banks have resorted to other means of raising cheaper funds through issuance of certificates of deposits (CDs). One-year bulk corporate deposits with banks are being placed at 8.5-9% and banks find it difficult to find a suitable asset that will break-even or give a marginal return. Hence they are now raising cheaper resources through CDs. The CD rates for one year, currently is at 8.2%.
?Bulk corporate deposits, form more than 40% of the base for banks with limited branches,? said Vibha Batra, co-head, financial sector ratings, Icra. ?The lower CD rates are giving these banks avenues to replace expensive bulk deposits,? she added.
Between September 6 and October 10, the total funds raised by banks through this route totalled Rs 10, 404 crore.
The rush for CDs has pushed up the demand for CDs, thereby pushing down the rate at which banks raise funds. Rates of one-year CDs fell to 8.2% on Thursday from 9.2% levels, a month ago. ?With more demand for CDs, secondary market yields have started to drop and this is reflecting on the primary market issue rates,? said a treasury head at a government bank.
Apart from lower costs, CDs are being opted by banks for its easy liquidity and the fixed tenure that reduces asset-liability mismatches to a great extent.
Analysts say that the recent festive discount offer by banks and housing finance companies has been largely to the cheaper fund resources available to banks in one-year CDs. Very recently, Housing Development and Finance Corporation (HDFC) cut home loan rates by 50 basis points, as part of its festive offer for the current month to 10.5%. Central Bank and Canara Bank too cut home loan rates by 50bps to 10.75% and 11% respectively.
Corporates, on the other hand, are shying away from using their high-cost working capital limits, currently sanctioned by banks. The working capital limits, currently at 12-14%, are far too expensive for corporates when they can access the primary market by converting the limits into commercial papers (CPs) at 7.25% to 8.40% for tenures between 3 month and 12 months.
One-year CPs hovers around 8.4%-8.5% as against the 9% level, three weeks ago. Between September 6 and October 11, corporates have raised Rs 585 crore in CPs.