Low credit growth in the banking sector and tight liquidity in the short-term money market have led to a decline in the issue of certificate of deposits (CDs), which are instruments issued by banks and bought by companies. CD issuances from the banks fell 17% to R35,1400 crore at the end of June from Rs. 42,2400 crore at the end of June 2012, according to the Reserve Bank of India data.
“CD issuances by the banks have been low in the first quarter of current financial year because credit growth is not picking up,” said RK Bansal, executive director, IDBI Bank.
CDs have maturity periods ranging from seven days to one year. These are a form of bulk deposits because minimum amount of a CD Rs1 lakh or more.
Tight liquidity in the banking system has pushed up the interest rates on CDs deterring banks from issuing CDs at higher rates.
Interest rates on CDs, which couple of months banks were hovering around 7-8%, have risen up to 11%. Banks are also avoiding CDs to bring down cost of funds.
“CD issuances are likely to fall further as banks are reducing their dependency on bulk deposits and shifting their focus on retail deposits,” said Ashutosh Khajuria, president of treasury, Federal Bank.