Banks Turn to Commercial Paper and CDs as Deposit Growth Lags Behind Credit

With deposit growth lagging behind credit growth, banks are increasingly turning to commercial paper and certificates of deposit to meet demand, according to the RBI's August Bulletin. Issuances of these instruments have surged significantly in the current fiscal year, amid concerns about a growing asset-liability mismatch for banks.

Banks are increasingly turning to commercial paper and certificates of deposit to meet credit demand, as deposit growth continues to lag behind, according to the RBI's August Bulletin released on Monday.

During 2024-25 (up to August 9), certificates of deposit issuances surged to Rs 3.49 lakh crore, significantly higher than Rs 1.89 lakh crore in the same period last year. Commercial paper issuances also saw an uptick, rising to Rs 4.86 lakh crore by July 31, driven largely by NBFCs' higher borrowings.

RBI Governor Shaktikanta Das voiced concerns about the trend during the unveiling of the bi-monthly monetary policy, urging banks to adopt innovative products to attract deposits. Finance Minister Nirmala Sitharaman echoed these concerns, calling on banks to strengthen relationships with customers, particularly in rural areas.

The RBI bulletin noted that domestic bond yields have eased, supported by favorable sentiment following India's inclusion in the global bond index. Despite surplus system liquidity in July and August, fueled by increased government spending and the return of currency to the banking system, the lagging deposit growth continues to pose challenges for banks.