Highlights
- Banks are increasingly relying on certificates of deposit (CDs) due to slow deposit growth.
- CD issuances rose by 59% from January to August 2024 compared to the same period in 2023.
- Many banks are hesitant to raise deposit rates in anticipation of potential RBI rate cuts.
- Over two-thirds of term deposits currently earn 7% or more interest.
- Changes in RBI policy may affect future demand for CDs among banks.
Indian banks are facing a significant challenge: the gap between their credit growth and deposit growth is widening.
This situation has led to an asset-liability mismatch, compelling banks to turn to certificates of deposits (CDs) as a crucial funding source.
Money market experts predict that banks will continue this trend as long as the deposit growth remains sluggish.
According to Gopal Tripathi, Head of Treasury at Jana Small Finance Bank, the issuance of CDs will likely remain elevated until the challenges on the deposit front are resolved.
Between January and August 2024, banks issued CDs worth ₹7.78 lakh crore, a substantial increase from ₹4.90 lakh crore in the same period in 2023, marking an impressive growth of approximately 59 percent.
Why Are Banks Turning to CDs?
Many banks are cautious about raising their deposit rates aggressively. They anticipate that the Reserve Bank of India (RBI) might soon cut rates if inflation trends downwards.
Venkatakrishnan Srinivasan, Founder and Managing Partner of Rockfort Fincap LLP, points out that by relying on CDs, banks can secure funds at lower short-term rates rather than committing to higher long-term deposit rates.
The widening gap between credit and deposit growth has raised alarms for both the government and the RBI. They have urged banks to innovate and enhance their deposit mobilization efforts.
RBI Deputy Governor M. Rajeshwar Rao recently highlighted the need for banks to diversify their product offerings to tackle the risks that could impact deposit growth.
Current Trends in Deposit Rates
Banks are raising interest rates on deposits. Currently, more than two-thirds of term deposits earn 7% or more, according to the RBI’s latest bulletin.
While the gap between credit and deposit growth is starting to narrow, concerns about the sustainability of this trend remain.
Srinivasan further elaborates that if the RBI shifts towards rate cuts or loosens liquidity conditions, the demand for CDs may decline, easing the pressure on banks to raise short-term funds.
This expectation has grown stronger after the US Federal Reserve recently cut interest rates by 50 basis points, prompting discussions about similar actions in India.
