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Banks have mobilised around Rs 8 trillion by issuing Certificates of Deposit (CDs) in the current financial year (FY25), amidst a scramble for deposits in a tight liquidity environment and to manage their funding costs.
According to data compiled by Primedatabase, CD issuances in FY25 (up to December 13) have totalled Rs 7.93 trillion. In the first fortnight of December alone, issuances exceeded Rs 81,000 crore and are expected to surpass November’s total of Rs 92,260 crore. In FY24, CD issuances amounted to Rs 9.56 trillion, compared to Rs 7.28 trillion in FY23, Rs 2.87 trillion in FY22, and Rs 90,890 crore in FY21.
CDs are negotiable money market instruments issued by banks, with maturities ranging from a minimum of seven days to a maximum of one year. Financial institutions, on the other hand, are allowed to issue CDs with maturities between one and three years. They are rated by approved rating agencies, which enhances their tradability in the secondary market, depending on demand.
“The issuance of CDs by banks is primarily driven by the need to manage their funding costs and credit-to-deposit gaps. In a highly competitive deposit environment, banks are aggressively pursuing deposits but are also relying on CDs. CD issuances have remained elevated in the current financial year (FY25), although this may stabilise in the future,” said Saurabh Bhalerao, associate director and head – BFSI research, Care Edge.
“One of the key advantages of CDs for banks is the flexibility they offer in terms of repricing when interest rates change, unlike term deposits, which typically lock in rates for a comparatively longer tenure,” he said.
A treasury official explained the reliance of banks on CDs is essentially because the CD market among financial institutions offers multiple benefits, including trading opportunities, managing maturity gaps, and providing liquidity, etc.
CDs are a cost-effective alternative to bulk term deposits, and contribute to the deposit pool. Additionally, they allow banks to replenish maturing deposits, ensuring smooth liquidity management; hence, there is a reliance on such instruments.
While loan growth in the economy has moderated from its peak, it is expected to pick up as we enter the business end of the financial year. With deposit mobilisation remaining slow, the issuance of CDs may not slow down in the coming months, experts said. Credit growth in the fortnight ending November 29 slowed to 10.64 per cent year-on-year (Y-o-Y), growing almost in tandem with deposits, which posted a growth of 10.72 per cent Y-o-Y during the same period, according to the latest data from the Reserve Bank of India (RBI).
“There is a significant chase for deposits among banks, and of the deposits mobilised, nearly 22 per cent is allocated to fulfilling regulatory requirements. As a result, banks will likely turn to alternative funding sources, such as CDs. Issuances are expected to remain high, as banks will roll over maturing CDs, especially when other funding sources are relatively scarce,” said Gopal Tripathi, head of treasury and capital markets, Jana Small Finance Bank.
Meanwhile, Anil Gupta, senior VP and co-group head – financial sector ratings, ICRA, said the total outstanding CDs currently stands at Rs 4.5 trillion. Given a typical tenor of 90 to 180 days and consequent rollover requirements, total issuances will surpass Rs 9 trillion for FY25.
“While the year-on-year growth in outstanding CDs remains robust, given the slowdown in credit growth, the sequential growth in CDs outstanding has slowed. With the recent CRR cut, some liquidity will be released into the system to meet credit demands, which could reduce banks’ reliance on CDs for incremental credit growth. Given the LCR constraints, CDs are not a preferred funding tool, but a short-term liquidity management tool, and hence a significant surge in CD outstanding is unlikely,” he said.
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