The Hindu Business Line : Certificates of deposits find favour with banks

Bangalore, Oct. 23 In a bid to cut the cost of working funds, public sector banks are beginning to raise the quantum of certificate of deposits (CD) in their overall deposit mix.

Almost all public sector banks have shifted their bulk deposits to CD, top bankers said. Banks are no longer offering preferential rates, as in the past, on bulk deposits. The increased intake through CDs is intended to help banks bring down the weighted average cost of working funds that currently ranges between 6.5 and 6.75 per cent.

Last year, some of the banks had capped their bulk funds intake to 30 per cent of the gross deposits. However, bankers said that this cap did not apply to CD intake. With CD rates falling sharply, the bankers said, resources raised through this route would be in the region of about 35 per cent.

Almost all the CD issues raised during the last few weeks ranged between 5.5 per cent and 5.8 per cent. The SBI associate banks raised resources between 11 and 12 month maturities taking advantage of the low rates. Among the banks that raised large CD funds during the current month included the State Bank of Travancore and the State Bank of Bikaner and Jaipur. Both these banks together raised close to Rs 500 crore in the first week of the current month alone. But some banks were also raising shorter tenure CDs. Punjab and Sind Bank for instance raised three-month CDs at 3.8 per cent.

Short term CDs

Bankers said that the shorter tenure CDs allowed them to lend for short-term loans to corporates. But some market-savvy banks are also making medium-term advances, expecting to refinance the CDs with retail deposits or fresh issues at lower rates in the coming weeks. The shift to short-term CDs is also largely driven by the declining yield on funds (weighted average of yield of advances and investments). The yield on funds for the last quarter for almost all the banks was in the region of 8.5 per cent, resulting in shrinking in their respective net interest margins.

As a result some banks stood firm against any large reduction in lending rates. According to the Vijaya Bank Chairman and Managing Director, Mr Albert Tauro, “We will not lend below rates that are inconsistent with our own cost of raising resources.” He said that there are loan re-pricing demands, though the bank is unwilling to accede to the requests since it would impact their interest margins.

Interest margins are already under pressure due to weak credit off-take, especially investment credit. Non-food credit growth this year was only 12 per cent. For the corresponding period of the previous year, the growth was 25 per cent. Even this weak growth, the bankers said, was achieved largely from the push in short-term loans towards the last few of weeks of the second quarter of this year.

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