Indian banks to rely on certificates of deposit to fund year-end credit demand, officials say

Indian banks are planning to issue more certificates of deposit to meet the year-end loan demand as attracting deposits remains difficult. With retail sales peaking during the festive season, banks are opting for CDs due to competitive bulk deposit space and …

Indian banks are set to issue more certificates of deposit to meet year-end loan demand as deposit mobilisation remains challenging, six bankers said.

Certificates of deposit (CDs) are debt instruments with maturities of less than one year issued by banks.

“With the bulk deposit space becoming increasingly competitive, banks will be looking to issue more CDs to meet the rising credit demand ahead of the festive season,” a senior treasury official at a mid-sized private sector lender said.

In India, retail sales peak during October-December, when the nation of 1.4 billion celebrates major festivals.

The stock of outstanding CDs rose to a record high of 5.15 trillion rupees (about $61 billion) at the end of August. Since then, banks have issued more than 1 trillion rupees of these notes, clearing house data showed.

Loans given by Indian banks have been growing at double-digit percentages since April 2022, boosted by a spike in consumer spending, but the rise in deposits has lagged. Banks’ loans grew 13.3% year-on-year in the fortnight to Sept. 6, while deposits rose by 11.1%.

“Garnering retail deposits typically incurs additional cost through marketing spends, especially in such a competitive market, which is why we would prefer CD route for some time,” a banker said, citing “healthy” demand from mutual funds.

Banks’ reliance on these short-term notes is likely to persist despite the central bank urging them to garner more long-term funds to minimise potential asset-liability mismatches and spur financial inclusion, a separate source aware of the central bank’s thinking said.

The bankers and the source requested to not be named as they are not authorized to speak to the media.

The Reserve Bank of India did not immediately reply to a Reuters email seeking comment.

“Owing to low interest rates and no tax benefit (on deposits), investors are flocking towards equity market for better returns… a combination of tight liquidity, sluggish deposit growth, shift in retail investments has led to a surge in CDs,” said Bhushan Kedar, director – funds and fixed income research at CRISIL Market Intelligence and Analytics. ($1 = 83.9750 Indian rupees)

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