Indian bank borrowing costs reach highest level in six years

Banking institutions in India are currently grappling with the highest costs for short-term capital in six years. This surge is primarily driven by a significant disparity between robust credit demand and lagging deposit growth, forcing lenders to turn toward certificates of deposit (CDs) at record levels. By the end of February, the total outstanding value of CDs reached an all-time high of 6.64 trillion rupees, marking a 75% increase over the past two years. This shift highlights the pressure on banks to secure funding from institutional investors as retail deposits fail to keep pace with lending activity. > Some banks have raised fixed deposit rates, but the credit growth is so strong that lenders have to rely on CDs, and some pressure should persist till the end of the year. Binod Kumar, the Managing Director and CEO of Indian Bank, noted that while interest rates on fixed deposits have been adjusted upward, the demand for credit remains the dominant factor. The benchmark rate for three-month CDs recently climbed to 7.41%, creating a spread of 210 basis points over the three-month treasury bill yield of 5.31%. This gap represents the widest margin seen since the onset of the pandemic in March 2020. Market analysts suggest that while rates may soften slightly in the coming months, the structural imbalance between deposits and credit is expected to persist. Abhishek Bisen, the head of fixed income at Kotak Mutual Fund, emphasized the need for systemic support to stabilize the market. > A sustained infusion of liquidity and ensuring an adequate surplus in the banking system would help compress CD spreads. To mitigate these pressures, lenders are seeking regulatory approval to issue CDs with maturities of up to three years. This move is intended to diversify their liability profiles and reduce the current over-reliance on the three-month funding window, which has become increasingly congested.