State Bank of India (SBI), which is the biggest bank in the country, is said to be the largest buyer of special financial instruments called Certificates of Deposit (CDs) issued by IndusInd Bank. These CDs are worth Rs 12,850 crore and were issued on March 17.
IndusInd Bank is facing a major financial issue related to derivatives transactions, which could reduce its net worth by ₹1,600-2,000 crore. This has raised concerns about hidden risks in the bank’s financial books. On March 10, the bank revealed that its net worth would drop by 2.35% due to discrepancies in its derivative. As soon as this news was released, share price of IndusInd bank declined rapidly. There were news that IndusInd Bank is suffering from financial crisis and soon RBI had to intervene. IndusInd Bank decided to raise money via Certificate of Deposits to strengthen its financial position and gain confidence of investors.
Now, a news has come that SBI and other public sector banks have saved IndusInd Bank. SBI and other psu banks have invested their money in certificate of deposits issued by IndusInd Bank.
The main reason investors, including SBI, were interested in these CDs is because they offered higher returns (yields) compared to similar instruments issued by other banks. Additionally, the Reserve Bank of India (RBI), which is India’s central bank, gave assurances about IndusInd Bank’s financial health. This helped build trust among investors, encouraging them to buy these CDs.
Most of the CDs were bought by government-owned banks, with SBI being the biggest buyer. The remaining CDs were purchased by mutual funds, which are investment companies that pool money from many investors to buy securities like CDs.
How Do IndusInd Bank’s CDs Compare to Others?
According to data from the Clearing Corporation of India (CCIL), the average return (yield) on IndusInd Bank’s CDs was 10-15 basis points higher than CDs issued by other private and government-owned banks this month. To put it simply, one basis point is 0.01%, so 10-15 basis points means the returns were 0.10% to 0.15% higher than others. This made IndusInd Bank’s CDs more attractive to investors.
IndusInd Bank had also raised money through CDs earlier in March. On March 11, it issued CDs worth Rs 11,000 crore, and on March 10, it raised Rs 1,850 crore. This shows that the bank has been actively raising funds through this method.
What Did the RBI Say About IndusInd Bank?
On March 15, the RBI released a statement saying that IndusInd Bank is financially stable and has enough capital to meet its obligations. Specifically, the bank reported:
- A Capital Adequacy Ratio (CAR) of 16.46%, which means it has enough capital to cover its risks.
- A Provision Coverage Ratio (PCR) of 70.20%, which means it has set aside enough money to cover potential loan losses.
- A Liquidity Coverage Ratio (LCR) of 113% as of March 9, which is higher than the regulatory requirement of 100%. This means the bank has enough liquid assets to handle short-term financial needs.
Why Were There Concerns About IndusInd Bank?
Despite the RBI’s reassurance, there were some concerns about IndusInd Bank recently. Last week, the bank reported discrepancies (errors) in its derivatives portfolio. Derivatives are complex financial instruments tied to the value of assets like currencies or stocks. These errors could lead to a one-time loss of Rs 2,000 crore in the March quarter. The bank discovered these issues while reviewing its currency derivatives portfolio.
What Are Certificates of Deposit (CDs)?
CDs are short-term financial instruments issued by banks and some financial institutions to raise money. They are sold to individuals, companies, and funds, and they help banks increase their deposit base. In simple terms, when a bank issues CDs, it borrows money from investors for a fixed period and pays them interest in return.
Impact on IndusInd Bank’s Deposit Base
Experts believe that the issues in IndusInd Bank’s derivatives trades might have affected its deposit base. A deposit base is the total amount of money customers have deposited in the bank. If customers lose confidence in the bank, they might withdraw their deposits, which can create financial challenges for the bank.
