Public banks crowd out others on Debt St

Traditionally, yields have spiked in the last quarter of a fiscal as banks rush to shore up funds through the certificate of deposits market. But the last two years have seen yields on one-year CDs really take off as public sector banks crowded out other borrowers such as non-banking finance companies from the corporate debt market.

The yield curve, as a consequence, looks incongruous, inverted –- the short-end is rising in the time of lowering rates, while the longer end is drooping.

In the last quarter of last fiscal, the yield on the one-year paper had risen to 11.5-12 per cent. Indications are yields would do a double-digit redux by March-end.

One-year paper currently trades at 9-9.25 per cent. The yield on this has risen by a huge 50-60 basis points in the last one month.

But the rise this time is surprising because, unlike last year, liquidity is easier with call rates at around 6.20-6.25 per cent and credit growth also lagging deposit growth.

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K Ramkumar head of fixed income, Sundaram BNP Paribas Mutual Fund, said last year deposit growth was modest at 20-21 per cent, while credit growth was high above 30 per cent. "This year the situation is reverse. Credit growth is down and deposit growth is up."

So then why are banks in such a hurry to garner funds?

First is that a lot of paper was issued –- at higher rates –- by banks around this time last fiscal. These are maturing and have to be refinanced or rolled over at lower cost.

The second is to shore up bank balance sheets before the year ends. Experts said even if banks don't need the money a larger balance sheet makes good reading particularly at the end of the year.

So far most public sector banks have issued CDs, prominent among them being State Bank India and its associates, Canara Bank and Federal Bank.

Among private banks ICICI has done so, too.

Bankers admit the pressure to garner funds this year has been lower comparatively. "I don't see too much pressure this time," said Sudhir Joshi, treasurer, HDFC Bank. He laughs off the current spike to "old habits" of banks, saying this is a purely yearly phenomenon.

G K Shettigar, assistant vice president, L&T Finance, believes this is not the right time to borrow if you are an NBFC.

"NBFCs should sit tight, it does not make sense to borrow money at such high rates," he said.

L&T Finance completed its borrowing for the year in December-January anticipating a spike in rates and also as liquidity tightens by the end of the financial year due to advance tax outflows in mid March.

"Low business sentiment this time has also contributed to the jump in yields. For ample the 90-day commercial paper yield is at least 100 basis points above its normal rate," he said.

The 90-day CP is trading at around 9.40 per cent yield currently.

With competition among banks heating up to garner funds, yields could stay up for a while. Experts predict the 1-year yield can nudge or pierce 10 per cent by mid-March.

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