Liquidity tightness in the banking system has pushed the bulk deposit rates of banks higher than Certificate of Deposit (CD) rates. Struggling to raise funds, some banks are offering 10-20 basis points higher rates on short-term bulk deposits than CD rates.
“Banks with lower rating than AA+ are finding it difficult to raise funds at market rates. They are offering 10-20 basis points higher rates on short-term bulk deposits CD rates for raising funds for short term,” head of treasury of a private bank told FE. “Bulk deposit rates rising above CD rates reflect the desperation of banks for funds,” he added.
Interest rates on 6-month CDs are currently at 7.83% while rates on 3-month CDs are around 7.72%.
Bulk deposits rates of banks have risen around 30-40 basis points in the past three months amid tight liquidity situation.
In the normal circumstances, when the liquidity is not tight, bulk deposit rates of banks are 20-40 basis points lower than the CD rates.
“The demand for short term funds from the banks rise during the fourth quarter because banks like to show good growth in their liabilities,” Soumyajit Niyogi, director – Core Analytical Group, India Ratings & Research said. “Banks are unlikely to see any relief in short term on the liquidity front because advance tax payments are due next month,” he added.
The demand for credit will also remain high in the fourth quarter which will also force banks to raise short-term funds, he added.
Banking sector has been facing the problem of deposit growing slower than the credit.
Credit offtake continued to grow, increasing by 20.3% year-on-year (y-o-y) to reach `161.5 trillion, for the fortnight ending February 9, according to Care Ratings report. Growth in credit includes the impact of HDFC’s merger with HDFC Bank, along with the growth in personal loans. Excluding the impact of the merger, credit grew at a lower rate of 16.3% y-o-y for the fortnight compared to last year’s growth of 16%.
Deposits have grown 13.6% y-o-y for the fortnight (including the merger impact) and reached `202 trillion as on February 9, 2024. Excluding the merger impact, growth stood at 13%. Sequentially, there was an increase of 0.7%, driven by growth in time deposits. Deposit growth is expected to improve compared to earlier periods as banks look to shore up their liability franchise and ensure that deposit growth does not constrain the credit offtake.