SBI withdraws from CD market

Banks heave a sign of relief as short-term rates will likely fall

State Bank of India (SBI) — the nation’s largest bank — has decided to withdraw from the certificate of deposit (CD) market, a move that has left most market players relieved as they were paying more than 10 per cent for even three-month CDs. Short-term rates, which have moved up 200 bps in the last four months, are now expected to come down.

According to sources, SBI communicated to its dealers on Thursday that it is withdrawing from the CD market and will not offer any special rates (above the card rate) on bulk deposits. Banking industry sources said the decision was taken to improve yields. The fact that the bank had surplus liquidity of Rs 40,000 crore with a comfortable statutory liquidity ratio, nearly three per cent more than mandated, triggered the move, market participants said.

Liquidity managers were expecting the rates to harden further as banks would rush for funds to shore up their balance sheets towards the end of the financial year. After SBI’s decision, other players are breathing easy as they expect the rates to come down in the near future. On Thursday, the rates on most of the three-month CDs were 10.10 per cent while one-year CDs were issued at 10.15 per cent.

“If we take deposits at 10 per cent, lending can happen only at 12 per cent after factoring in the cash reserve ratio and statutory liquidity ratio costs. It is difficult to find buyers for loans at that rate,” said a treasury official of another public sector bank. Following the liquidity crunch during the latter half of 2010, banks have been raising deposit rates to support a robust loan growth.

Interestingly, SBI was there in the CD market but was not a regular issuer. The bank had been active in the CD market since the last quarter before CD rates started rising.

“SBI is not a regular issuer, it raised Rs 850 crore on January 31 for three months at 9.45 per cent and before that in November,” said a dealer with a brokerage firm. According to dealers, quotes from SBI had resulted in rates moving north. Even though SBI was not a regular issuer, most of its associate banks were regular issuers of CDs in the last few months.

“When SBI quotes CDs at 9.85 per cent, for example, other banks desperate for funds are left with no option but to offer higher rates,” said a dealer with a public sector bank.

Another factor which helped SBI take the decision was the overwhelming response to the second tranche of the bank’s retail bond issue this week. The bank collected two-three times more than the notified amount of Rs 2,000 crore.

Source: Business Standard