Deep Dives

CD supply hits 4-mo high as PSU banks dash to mkt at qtr-end

Informist, Thursday, Jul 11, 2024

By Sachi Pandey

MUMBAI – Fundraising through certificates of deposits surged to a four-month high of 1.5 trln rupees in June as state-owned banks rushed to fulfil a cyclical rise in their funding needs towards the end of the financial quarter, industry players said. Of the total CD issuances last month, public sector banks accounted for over 69%.

Typically, borrowing through CD issuances picks up towards the end of a quarter as banks seek to disburse additional loans to show strong credit growth. The 1.5 trln rupees raised through CDs in June was 80% higher than what banks borrowed in May, according to data compiled by Informist.

This is the first time that CD issuances have surpassed 1 trln rupees in 2024-25 (Apr-Mar). The last instance of such a whopping amount through CDs was in March, when the banks had raised 1.27 trln rupees. In June 2023, banks had issued CDs worth 729 bln rupees.

Punjab National Bank was the largest issuer of CDs last month, raising 308 bln rupees, followed by Canara Bank with 253 bln rupees and Union Bank of India borrowing 211 bln rupees. Among private sector banks, HDFC Bank was the top issuer, raising 222 bln rupees. IDBI Bank raised 47 bln rupees through CDs.

According to market participants, tight liquidity conditions drove banks to the short-term debt market. While data shows that banking system liquidity was in a surplus of 289 bln rupees during the beginning of the month, and at 279 bln rupees towards the end, it largely remained in deficit throughout the month. In fact, the liquidity deficit had widened to as much as nearly 1.7 trln rupees following the first instalment of corporate advance tax payment for 2024-25 and monthly goods and services tax payment.

Tight liquidity conditions prevailed despite the Reserve Bank of India's frequent interventions through repo auctions. The central bank conducted five variable repo auctions and two variable rate reverse repo auctions in June to manage liquidity.

Market participants believe that the RBI's announcement of a reduction in Treasury bill supply boosted demand for short-term debt papers.

"They (RBI) had reduced the borrowing, which helped increase liquidity. If the government is not taking out money through treasury bills, then much more money is available to go into other money markets such as CPs and CDs. That was also a positive for the short-term debt market," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.

On May 17, the RBI issued a revised calendar for the government's Treasury bill issuance from May 22 to Jun 26, reducing the quantum to 600 bln rupees. Following this revision, the government aimed to raise a total of 720 bln rupees through T-bills by the end of the quarter in June.

Overall, CD rates remained relatively stable throughout the month, around 7.15-7.35%. While rates briefly dipped by 7 basis points due to higher demand from mutual funds, they soon returned to their original level as the liquidity deficit widened.

"Rates have largely stayed flat...RBI also stepped up on liquidity, so even though issuances went up, there was no requirement to hike rates because of adequate liquidity and funds were available, so banks raised CDs at more or less the same rates," Pawar said.

Going forward, market participants expect the momentum in CD issuances to continue in July, driven by volatile liquidity conditions and strong credit growth.

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Funds raised through the issuance of commercial paper rose to 1.6 trln rupees in June, 22% higher from a month ago due to higher borrowing by non-banking financial companies, which accounted for over 70% of the total quantum. Non-banking financial companies raised 1.13 trln rupees in June, up 22% on month, and fundraising by manufacturing companies rose 26% on month to 396 bln rupees.

Among CP issuances, National Bank for Agriculture and Rural Development was the biggest issuer, raising 205 bln rupees. The Export Import Bank of India was a distant second with issuances worth 147 bln rupees. Other major issuers included Small Industries Development Bank of India, Bajaj Finance, and Reliance Retail Ventures.

Last month, CPs worth 1.44 trln rupees came up for redemption compared with 1.41 trln rupees in May, according to data compiled by Informist. Of the total CPs scheduled for redemption last month, papers worth 1.19 trln rupees were rolled over.

Tight liquidity conditions during the month and higher demand pushed up rates on non-banking financial companies around 25 basis points. "Short-term debt rates reflect the liquidity situation. So with liquidity deficit and increased demand, rates moved up," said Mahendra Jajoo, chief investment officer at Mirae Asset Investment Managers.

By the end of June, rates on three-month CPs issued by non-bank lenders were at 7.90-8.10%, while those of similar maturity issued by manufacturing companies were at 7.27-7.47%.

Details of CPs and CDs issued in June, as per data sourced from the Clearing Corp of India and compiled by Informist (all figures, except percentages, in bln rupees):

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