Muted credit growth and sufficient liquidity, thanks to a relatively good deposit growth, has led to a fall in issuances of certificate of deposits (CD) with outstanding CDs at the lowest level in five-and-a-half years, Reserve Bank of India data show.

Certificate of deposits are money market instruments through which banks raise short-term funds. Their tenure ranges from seven days to a year.

As on June 12, the outstanding amount of CDs stood at R 2.34 lakh crore — the lowest since October 23, 2009, when it was Rs 2.27 lakh crore. On a year-on-year basis, the figure has seen a decline of 27.48%. Ashutosh Khajuria, executive director at Federal Bank, attributes this fall to the muted credit growth and a reasonable deposit growth. “Banks raise wholesale deposits when retail deposits are not able to fulfil credit requirements. When credit growth itself remains so muted, what is the need for raising funds through wholesale deposits?” said Khajuria.

Whenever credit growth picks up, banks fulfil the loan requirements through retail deposits after which other sources of funding, such as bulk deposits and certificate of deposits, are considered.

According to the latest RBI data, non-food credit grew a mere 9.48% y-o-y, with companies turning to corporate bonds and commercial papers as their rates stood 100-150 bps lower than the bank base rate. In contrast, deposit growth stood at 11.38%.

With deposit growth being considerably more than the credit offtake, the banking system is witnessing sufficient liquidity, which is reducing its dependence on CDs.

Sanjay Arya, executive director at United Bank of India, says liquidity in the banking system earlier used to be in the negative zone, quite in contrast to recent times.

“Previously, the liquidity in the banking system used to be in the negative zone to the tune of R80,000-90,000 crore and repo borrowing on a daily basis would not be a stable source of funding. Moreover, the Reserve Bank of India also put a limit on how much could be raised through repo. So, all these things culminated into banks issuing a lot of CDs,” says Arya.

“But now we are witnessing a situation of adequate liquidity combined with a muted credit growth. Whatever demand for credit is there could be easily met with term deposits in addition to repo,” he says.

With lower issuances and higher appetite in the system due to adequate liquidity, yields on CDs have also been trending downwards.

“Banks are hardly issuing any certificate of deposits and we are witnessing ample liquidity in the system. This demand-supply mismatch is pulling the yields on CDs lower. The yield on a two-month CD stands in the range of 7.5-7.55%, while for a three-month CD, it is close to 7.6-7.65%,” says Lakshmi Iyer, chief investment officer at Kotak AMC.