Companies Increasingly Raising Funds Directly from Market via Commercial Papers
Companies in India are raising more funds directly from the market through commercial papers (CPs), while banks prefer certificates of deposit (CDs) to take advantage of negotiable borrowing costs. With the Reserve Bank of India (RBI) requiring banks to maintain an incremental CRR of 110% of net demand and time liabilities, as well as the resulting liquidity squeeze, CD issues increased once more.
Furthermore, deposit growth is still trailing credit growth, which was 14.2% in August. Deposits increased rapidly only after the 2,000 notes were recalled. However, they began to slow down again after the majority of such notes were returned to banks. Banks have relied on alternative sources of funding to supplement funds, one of which is the issuance of CDs.
"Retail credit also has been growing at a steady rate. As a result, banks had to increase their reliance on other sources of funds to meet the growing credit demand," said a research note by Bank of Baroda.
Fresh CD issues reported on a fortnightly basis are at ₹2.62 lakh crore during April-August, higher than the ₹2.5 lakh crore in the same period last year. "With the upcoming festive season and tax outflows, this trend is likely to continue in the near future," said Aditi Gupta, economist at Bank of Baroda.