By Manish M. Suvarna

Mumbai, Aug 23 (IANS): The rising demand for credit in last couple of days has prompted banks to garner funds aggressively through certificates of deposits (CD), bonds, and fixed deposits (FD). The need for aggressive fund raising arose after the surplus liquidity in the banking system dropped sharply from the record high.

According to the data compiled by Prime database, banks have so far raised around Rs 42,000 crore through CDs. This was even after the rates on this instruments are rising sharply.

The data also showed that Indian Bank, topped the fund raising list via CDs, raising worth Rs 13,550 crore, which was followed by HDFC Bank raising Rs 6,550 crore and Punjab National Bank raising Rs 2,875 crore so far in August.

Apart from this, there are various banks such as State Bank of India (SBI), Indian Overseas Bank, Indian Bank, Punjab National Bank, Kotak Mahindra Bank, ICICI Bank, among others have increased their FD raised 5-20 basis points across maturities to attract more investors.

"As liquidity is draining out in a calibrated manner from the system, banks are compelled to raise funds through CDs and even through fixed deposits. Some banks are offering special rates for higher FD amounts. With growth picking up, we can expect banks to aggressively raise funds from the market," said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincorp, a Mumbai-based debt advisory firm.

Banks credit growth has remained in double digits handily outpacing the deposit growth. The credit growth has increased in couple of weeks due to low base effect, small ticket size loans, higher working capital requirements due to elevated inflation and a shift to bank borrowings on account of high yields in the capital market.

The bank credit has grown over 14 per cent on-year, as per data on the Reserve Bank of India showed.

Meanwhile, liquidity in the banking system has cropped sharply in last couple of months. Currently, it around Rs 45,000 crore, as compared to Rs 1.30 lakh crore last week. The sharp drop has been witnessed due to payments for government bonds and outflows on account of goods and service tax payments.

Going forward, market participants expect banks to raise more funds because credit demand is likely to rise amid festive season. While, rates on the instruments will also rise due to narrowing of surplus liquidity.

"This pace may continue with back of credit off take and RBI attempts to normalise liquidity, banks need to meet the demand and get the cheaper sources of funds be available so raising via CD and capital instruments to meet the credit demand and preparing oneself for this ahead of festivals and busy seasons," said Ajay Manglunia, MD and Head Institutional Fixed Income at JM Financial.