Mumbai: Indian companies are raising more funds directly from the market through commercial papers (CPs), and banks are choosing certificates of deposit (CDs), to benefit from negotiable borrowing costs.
With the Reserve Bank of India (RBI) mandating banks to maintain an incremental CRR of 110% of net demand and time liabilities and the resulting squeeze on liquidity, CD issues once again increased.
Moreover, deposit growth at 13.2% is still lagging behind credit growth, which was 14.2% as of August. Deposits rose at a rapid pace only when the ₹2,000 notes were recalled. But they started slowing again after the majority of such notes were returned to banks.
To augment funds, banks have relied on alternative sources, one of which is through the issuance of CDs.
“Retail credit also has been growing at a steady rate. As a result, banks had to increase their reliance on other sources of funds to meet the growing credit demand,” said a research note by Bank of Baroda.
Fresh CD issues reported on a fortnightly basis are at ₹2.62 lakh crore during April-August, higher than the ₹2.5 lakh crore in the same period last year. “With the upcoming festive season and tax outflows, this trend is likely to continue in the near future,” said Aditi Gupta, economist at Bank of Baroda.
Most CD issues have a maturity period of less than four months. In fact, out of the total issues of ₹2.62 lakh crore in FY24, the share of CDs with a maturity period below 4 months was 72.5%.
A revival in industrial activity along with the government’s capital expenditure push resulted in increased demand for funds in the manufacturing sector as well to meet working capital needs.
These are also being met by raising CPs directly from the market, and doing so works out to be cheaper than bank lending rates – especially for top-rated corporates. Also, NBFCs have also started raising directly from the market through CPs to meet their growing credit demand. Outstanding CP issues have gone up by nearly ₹1 lakh crore between April and August, the latest central bank data showed.
“One of the reasons for the surge in CP issues is that housing finance companies are actively raising funds from the CP markets to meet their growing credit demand,” said Soumyajit Neogi, director at India Ratings and Research. “The lending rates of commercial banks have gone up and the bond yields have also hardened. So many of them are raising funds through CPs to contain their margins. But they are consciously making sure their exposure to CPs is not very high.”
