Why CDs and Mibor aren’t same2 min read . Updated: 14 Oct 2008, 12:03 AM IST
Why CDs and Mibor aren’t same
Why CDs and Mibor aren’t same
While the column didn’t name the banks involved, noting that was a precondition to confirming details of the transaction, some other media organizations have asked ICICI Bank Ltd if it was the bank involved in the transaction. Asked a similar question on CNBC-TV18, ICICI managing director and chief executive K.V. Kamath, while not confirming or denying that ICICI Bank was party to the transaction, had this to add: “That was in a week when call rates were hovering at 22-24%. I do not think I have to say anything more."
Indeed, there are bankers who agree with this view that there is nothing wrong in raising CDs at 20% or more when the call money rate, or Mibor—the Mumbai interbank offer rate—is trading around that level.
Also See Tight Liquidity (Graphic)
But let us look at some facts and that premise a bit more closely.
The bank that Bankers Trust wrote about raised the Rs1,000 crore in CDs around 6-7 October, when the Mibor rate and the average rate?at which banks?borrowed at the overnight call money market was hovering around 11%.
The Mibor is a polled rate of bankers, primary dealers who buy and sell government bonds, and other market intermediaries, while the call rate is the actual rate at which money is bought and sold. The National Stock Exchange, or NSE, launched Mibor for the overnight money market in June 1998. It is used as a benchmark rate for a majority of deals struck for interest rate swaps, forward rate agreements, floating rate debentures and term deposits. It is also equivalent to the daily call rate, or the overnight rate at which funds can be borrowed, and it changes every day, depending on the perception of the market players on interest rates.
A CD, in contrast, is a promissory note that bears a maturity date and a specified fixed interest rate. The maturity of a CD can be as short as a month or even less than that or as long as a year. Overall, there is no comparison between the overnight call rate, or Mibor, and the CD rate.
Indeed, the rates of CDs in recent days are hovering around 12.25-14%, depending on their maturity.
In the past, there have been occasions when call rates touched near-zero (happened last year) but no bank or corporation could raise a free CD at that time. Similarly, at least on one occasion in recent memory, the overnight call rate crossed 60%. At that time, the CD rates didn’t zoom to that level.
Essentially, they are two different instruments. Banks borrow and lend from the overnight call money market to take care of their very temporary asset-liability mismatches including meeting the reserve requirements of the regulator, while CDs can be used to even buy assets such as short-term treasury bills, if there is an arbitrage opportunity.
However, in this case, this particular bank borrowed money through CDs to fill in a temporary gap in its liabilities. In a low-interest regime, such things do not get reported, but when liquidity is tight and interest rates are rising, one has to pay through one’s nose for filling in such liability gaps. And that is why it was and is still news.
Graphics by Ahmed Raza Khan / Mint
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