In the past few months, certificates of deposits issued by banks have increased a lot.
Since 2020, on average 9878 crores of certificates were issued every fortnight. Last fortnight, issuances touched 50542 crores. Why?
Since 2020, on average 9878 crores of certificates were issued every fortnight. Last fortnight, issuances touched 50542 crores. Why?
For that we need a general understanding of a bank's sources of funds.
Banks have 3 main sources of liquidity
- Deposits
- Borrowing from the RBI
- Certificates of Deposits
Banks have 3 main sources of liquidity
- Deposits
- Borrowing from the RBI
- Certificates of Deposits
• Deposits - FDs, RDs, current account and savings accounts balances
• Borrowing from RBI - Banks borrow money from the RBI at the Repo rate where they pledge government securities and agree to repurchase (repo) at a later date at a higher price (determined by repo rate).
• Borrowing from RBI - Banks borrow money from the RBI at the Repo rate where they pledge government securities and agree to repurchase (repo) at a later date at a higher price (determined by repo rate).
There is another Marginal Standing Facility which banks can use to fund themselves during emergencies which is slightly more expensive than the repo rate.
• CD - Certificates of Deposit (CD) are generally certificates issued against deposits raised from institutional investors. The tenure is generally between 7 days to 1 year and these certificates are issued in multiples of 1 lakh.
Over the past couple of years, due to the pandemic there was a slowdown in economic growth and significant stress in the economy. To ease out this stress, RBI significantly increased liquidity in the system by printing more money.
There was more money in the hands of people and companies which ended as deposits with the banks.
Due to this banks were flush with liquidity and didn’t have to rely on CDs. In fact, banks were unable to lend out all this liquidity & ended up parking this money with the RBI.
Due to this banks were flush with liquidity and didn’t have to rely on CDs. In fact, banks were unable to lend out all this liquidity & ended up parking this money with the RBI.
What's the situation now?
Now that the economy has started to recover and inflation has started to heat up, the RBI has started increasing the rates and pulling liquidity out of the system.
Now that the economy has started to recover and inflation has started to heat up, the RBI has started increasing the rates and pulling liquidity out of the system.
Now with the recent measures, even with higher FD rates, banks are expecting that the deposits will not be enough to meet all liquidity requirements. and are using CDs to improve their liquidity position.
In fact SBI issued CDs for the first time in a decade a few months back. Similarly many other banks which had been away from the CD market are slowly testing the waters.
livemint.com
Will be interesting to see how the space develops.
livemint.com
Will be interesting to see how the space develops.
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