MUMBAI: Indian banks will approach the Reserve Bank of India for approval to raise bulk deposits for up to three years compared to the current one year cap, three sources familiar with the discussions said on Tuesday.
The suggestion was discussed between bank treasury executives and a market representative body last week, the sources said. The plan to request this change in regulation comes against the backdrop of weak deposit growth for banks and sporadic tightness in banking system liquidity.
Banks raise bulk deposits via certificates of deposit (CDs) for a tenor of upto one year from institutions when retail deposits are insufficient for meeting credit demand. This category of deposits is typically more expensive.
“There is no way deposit growth can match credit growth and banks are left with no option but to rely on CDs to meet balance sheet requirements,” one of the sources who attended the meeting said.
“Raising short-term CDs has become very expensive due to oversupply and diversification would help the industry lower its funding costs.”
The sources asked not to be named because they are not authorised to speak to the media. The Reserve Bank of India did not respond to a Reuters email seeking comment.
Indian banks’ credit growth jumped 14.5% year-on-year in the fortnight ended December 31, while growth in deposits lagged at 12.7% for the same period. The pace of credit growth accelerated at the end of last year from 11.5% in November.
India’s central bank proposes linking BRICS’ digital currencies, sources say
Indian lenders are paying around 7.00% to raise one-year funds — the highest so far this financial year, and the rates have been rising consistently despite interest rate reductions and bond purchases by the RBI.
By issuing CDs for longer tenors, banks would need to approach the market to refinance less frequently, allowing them greater clarity on cost and availability of funds.
Currently, only development financial institutions such as SIDBI, NABARD and EXIM Bank are permitted to issue longer-term CDs, but they rarely do so.
DEMAND FOR DEBT PURCHASES
Treasury executives will also pitch for more open market bond purchases from the central bank, including of state debt.
RBI Governor Sanjay Malhotra has previously said the central bank does not intend to purchase state debt.
“If borrowing cost for states continues to remain high, it will ultimately percolate into government bonds, and hence it makes sense for the RBI to address both the asset classes simultaneously,” a second source said.
The RBI had conducted a couple of open market purchases of state debt in fiscal 2021, but has stopped the practice since then.
Indian states are scheduled to raise 3.5 trillion rupees ($38.5 billion) in February-March, while the central government will raise 1.5 trillion rupees.
Heavy borrowing by states has pushed up bond yields, hurting transmission of lower rates in the economy.
American Dollar Exchange Rate