The “Deposit War” in Indian banking is forcing a rethink of regulatory limits.
According to sources, Indian lenders are approaching the Reserve Bank of India (RBI) with a crucial proposal: extend the tenor cap for raising bulk deposits (Certificates of Deposit) from 1 year to 3 years.
📉 THE CORE PROBLEM (The Jaws): Banks are facing a structural liquidity mismatch.
- Credit Growth: +14.5% (YoY).
- Deposit Growth: +12.7% (YoY).
- The Consequence: To fund the gap, banks are relying heavily on short-term bulk deposits, pushing 1-year rates to ~7.00%—the highest this financial year.
🛡️ THE PROPOSED SOLUTION:
- Longer Tenor: By allowing 3-year CDs, banks can lock in liquidity for longer, reducing the constant refinancing risk and volatility associated with the 1-year rollover cycle.
- Current Rules: Currently, only DFIs (SIDBI, NABARD) issue long-term CDs. Commercial banks are restricted to the 1-year cap.
🏛️ THE SECONDARY ASK (State Debt): Treasury heads are also pitching for the RBI to restart Open Market Operations (OMOs) in State Development Loans (SDLs).
- Reason: With states set to borrow ₹3.5 trillion in Feb-March, yields are spiking.
- Logic: Banks argue that high state yields eventually pull up sovereign yields, hurting monetary transmission.
💡 ANALYST TAKEAWAY: This proposal is a tacit admission that the deposit slowdown is structural, not transient. If the RBI approves 3-year CDs for commercial banks, it effectively creates a new asset class for mutual funds and insurers. It allows banks to better match their liabilities against medium-term loan books, moving away from the dangerous practice of funding 3-year loans with 1-year money.
👇 Treasury Heads: Would a 3-year CD market actually find buyers, or will liquidity remain concentrated at the short end?