I-CRR effect: Banks, NBFCs rush to raise short-term funds

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MUMBAI – Liquidity tightening in the banking system following the introduction of the incremental CRR (I-CRR) has prompted banks and NBFCs to raise short-term funds from money markets to manage their immediate fund requirements.

“In the backdrop of I-CRR and higher credit growth, banks will need to essentially raise funds via certificates of deposit (CDs) and bulk deposits. CD rates have gone up by about 10-15 bps in the last fortnight. Banks will be paying much more than CD rates for high value bulk deposits,” said V Lakshmanan, Head of Treasury, Federal Bank.

Most major banks such as Punjab National Bank, Canara Bank, HDFC Bank, Bank of Baroda and Indian Bank have issued CDs in the last 10 days, with 3-month CD rates at 7.00-7.20 per cent levels. Rates on three-month CPs have been in the range of 7.20-7.40 per cent.

I-CRR impact

“Rates have increased because of I-CRR. Many issuers were waiting on the sidelines to raise funds after the policy. So even though ICRR got introduced, they had to come to the market and issue their papers,” said CA Ashish Jalan, Vice- President – Arete Securities.

While earlier the expectation was that I-CRR will definitely be rolled back around September 8, a section of the market now believes that “it might get extended for a week or so” resulting in higher rates. This has prompted issuers to raise funds at the current levels, market participants said.

In addition to the announcement of the I-CRR on August 10, liquidity in the banking system has also tightened due to GST payments and sustained robustness in credit demand. Banking system liquidity fell into a deficit of ₹23,111 crore on Tuesday, per RBI data.

Banks prefer to offer higher interest on short-term (3-6 months) liabilities such as CDs as mobilising high-cost retail deposits could entail offering higher interest rates for a longer period. Similarly, NBFCs too have been looking to raise more short-term commercial papers (CPs) to avoid raising long-term funds at higher rates.

Call money rate up

“The call money rate has also risen above the repo in the last few trading sessions. Liquidity is drying up, but it is a temporary effect. Fresh borrowing for the short-term has resulted in CP rates going up and we expect them to remain elevated in the most liquid and AAA segments,” said Nagesh Singh Chauhan, Head- Debt Capital Markets, Tipsons.

Market participants expect rates to start stabilising from the first week of September as government spending kicks in. However, advance tax payments from the middle of the month could cause renewed tightness, leading to the expectation that rates will remain elevated for the next 1-1.5 months.