Banks Lean on CDs as Liquidity Deficit Persists
Why in the news
Banks turned to CDs, and large companies to CPs, for funds as the system stayed short of liquidity and RBI prepared more support.
Key facts
- CDs outstanding: record ₹5.19 trillion (7 February).
- CPs: ₹4.79 trillion (15 February), highest since October 2019.
- Liquidity deficit: ten weeks in a row, now ₹2.37 trillion.
- CDs worth ₹71,094 crore were issued in the two weeks to 7 February.
Reasons
- Slow deposit growth against strong fourth-quarter credit demand.
- Large borrowers prefer CPs, expecting lower policy rates.
- Today CDs form only 2.3% of deposits, versus 8% a decade ago before the LCR came in.
RBI measures
- $10 billion buy/sell swap, three-year tenor, on 28 February.
- Earlier $5 billion swap with a six-month tenor on 31 January.
About commercial paper
- Short-term, unsecured promissory note used by companies to raise funds.
- Issued at a discount; matures in one to six months.
- Usually issued by large corporations or banks for payroll, inventory and payables.
Exam angle
- CP maturity: one to six months; no collateral.
- Terms: CD, CP, LCR, swap.