Source: Mint
Context:
Banks in India may face temporary liquidity pressure in the March quarter as large volumes of short-term Certificates of Deposit (CDs) issued in recent months mature. Banks issued significant CDs in December, January, and February to manage tight funding conditions and slower growth in retail deposits.
What Are Certificates of Deposit (CDs)?
A Certificate of Deposit (CD) is a short-term money market instrument issued by banks to raise funds from institutional investors.
Key features
- Maturity period: 7 days to 1 year
- Usually offers higher interest rates than retail deposits
- Purchased mainly by mutual funds, corporates, and financial institutions
Banks use CDs to manage short-term liquidity needs.
Why Banks Issued More CDs Recently
Banks increased CD issuance mainly because:
1. Credit Growth Is Higher Than Deposit Growth
- Bank credit growth: ~13.4% year-on-year
- Deposit growth: ~11.2%
This gap creates funding pressure.
2. Slow Retail Deposit Mobilisation
Retail deposits have grown slowly, forcing banks to raise funds from the money market.
3. Tight Liquidity Conditions
Banks issued CDs to shore up liquidity buffers.
Impact on Liquidity Coverage Ratio (LCR)
The Reserve Bank of India requires banks to maintain a minimum Liquidity Coverage Ratio (LCR) of 100%.
What is LCR?
LCR measures whether a bank has enough high-quality liquid assets to meet 30 days of cash outflows.
Banks usually maintain 115–120% LCR as a safety cushion.
Why LCR May Fall
When CDs mature:
- Banks must repay the borrowed funds.
- These repayments count as cash outflows in the next 30 days.
- This reduces the LCR temporarily.
Analysts expect LCR to decline in Q4 FY2026 due to large CD maturities.
