Wednesday, June 17, 2009

PSUs using CD route to flock money for oil companies

In the last two days, banks were seen flocking the short term money market to mobilise resources urgently, to meet the sudden short term
loan demand from oil companies. As many as seven banks including Union Bank of India and Allahabad Bank have mopped up around Rs 2,500 crore collectively by issuing short term certificates of deposit (CD) in this week so far.

Senior bankers have confirmed that public sector undertakings (PSUs), especially oil companies have upped their short term loan requirement forcing banks to use the CD route.

Interest rate on three-month CDs was seen at 3.62% on Tuesday while it was 5.96% for one-year funds. Banks also need to shell out stamp duties over the market rate and need to set aside 5% of the mobilised fund with Reserve Bank of India on account of their cash reserve ratio (CRR) stipulation, making the total expenses on CDs a little more than the interest cost.

Yet, banks have preferred CDs over bulk deposits as CD rates have nose-dived amid surfeit of liquidity in the inter-bank system. Banks bulk deposit rates are also quite modest too but bankers reckon that raising bulk deposits have a disadvantage attached to it. PSUs, which place bulk deposits with banks, enjoy the option of premature withdrawal, thus making banks asset liability management difficult.

We have seen a sudden demand for short term funds from oil companies. That s the reason why we have raised resources urgently by issuing short-term CDs, a senior executive with United Bank of India (UBI) said. UBI, incidentally raised Rs 500 crore for three months via this route at 3.62%.

Allahabad Bank has garnered Rs 600 crore for a year at 5.95-96% on Monday. The bank had mobilised another Rs 300 crore last week at 5.9%. Confirming the development, a senior AllBank official said the funds would be used for its asset-liability management.

Market sources said Union Bank of India too raised funds (around Rs 325 crore) three-months on Tuesday at 3.62%, while Central Bank of India garnered Rs 500 crore for three months on Monday at a 3.65% rate. Likewise, State Bank of Hyderabad raised Rs 300 crore for one year while Punjab & Sind Bank mopped up Rs 500 crore for three to six months, according to CD market investors. However, no confirmation was available from both these banks.

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