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Banking industry

Indian Banks Rely Heavily on Certificates of Deposit to Mobilize Funds Amid Tightened Liquidity

Strategic Insights

— 2 min read

With the Reserve Bank of India's (RBI) tightened liquidity conditions and booming demand for credit, Indian banks have significantly increased their reliance on certificates of deposit (CDs) as a means of mobilizing funds, with issuances of such short-term debt instruments surging more than three times in the previous financial year. The RBI's April 2023 Monetary Policy Report stated that banks continued to rely on CDs for funding, issuing `3.8 lakh crore in H2 (up to March 24, 2023) on top of `3 lakh crore in H1.

Key Takeaways:

  • Indian banks issued `6.3 lakh crore in CDs in 2022-23 up to March 10, as against `2 lakh crore a year ago, reflecting a significant increase in their reliance on short-term debt instruments.
  • The issuances of CDs surged despite tightened liquidity conditions as the RBI moved to withdraw policy accommodation in the previous financial year and demand for credit growth began to outpace deposit growth.
  • According to the RBI's data, bank credit growth was 15.7% year-on-year as of March 10, far higher than the 10.3% deposit growth during the period.
  • Resource mobilisation by companies through commercial papers tapered to `6.4 lakh crore in October 2022-March 2023 from `7.3 lakh crore in April-September, reflecting a preference for bank credit amid firms.
  • The weighted average discount rate on issuance of commercial papers hardened to 7.21% in October-March from 5.53% in the previous six months.
  • Corporate entities continued to be the largest issuers of commercial papers, but their share declined to 42% in October-March from 52% in April September.

Statistics:

  • Indian banks issued `3.8 lakh crore in CDs in H2 (up to March 24, 2023) on top of `3 lakh crore in H1.
  • The issuances of CDs surged more than three times in the previous financial year.
  • Bank credit growth was 15.7% year-on-year as of March 10, far higher than the 10.3% deposit growth during the period.
  • Resource mobilisation by companies through commercial papers tapered to `6.4 lakh crore in October 2022-March 2023 from `7.3 lakh crore in April-September.
  • The weighted average discount rate on issuance of commercial papers hardened to 7.21% in October-March from 5.53% in the previous six months.
  • Currency in circulation (CIC) expanded by `2.2 lakh crore during October-March up to March 24, driven by demand for cash during festivals.

Sources:

  • Reserve Bank of India (RBI), April 2023 Monetary Policy Report.
  • RBI's March bulletin.
  • RBI data.
  • So umyajit Niyogi, director, India Ratings & Research.

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