Negotiable Certificates of Deposit Helps Improve Loan-to-Deposit Ratio

BY  | FROM CSFJN | 2013-09-17 09:49

If China launches negotiable certificates of deposit (NCD) in the future, it can help improve banks’ pricing ability, said Wen Bin, the head of macroeconomic research at the Bank of China, during an exclusive interview with China Securities Journal. The issuance of NCDs may be able to partly replace interbank deposits and on-sheet wealth management products, which can not only reduce the borrowing costs of the bank, but also improve the loan-to-deposit ratio. Though the quota for the pilot scheme is too little to make a difference, it is timely assistance to those banks that are in short of cash and under pressure due to the loan-to-deposit ratio requirement.
As deposit rate is the only thing subject to regulatory control in China, the relaunch of NCDs will not only increase the percentage of market-based pricing in the liabilities of commercial banks, but also reinforce the status of Shibor as the benchmark and make interbank monetary policies more effective. To be specific, it has two bearings: to enrich the maturity structure of Shibor, and to increase commercial banks’ pricing ability.
Wen introduced that there are three species of NCDs: three-month, six-month, and twelve-month,as stipulated in the Administrive Measures for Negotiable Certificates of Deposit (1996). The NCDs to be launched this time will mostly mature in less than one year, which will be used to replace interbank deposits, on-sheet wealth management products, and other short-term liabilities. In the future, commercial banks may be able to issue three-year, five-year and other medium to long-term NCDs.
Wen pointed out that NCDs have three advantages over interbank deposits: the nature of being proactive, transparency, and stability. More importantly, NCDs are similar to interbank deposits in that they are issued to the same group of persons. According to the Administrive Measures for Negotiable Certificates of Deposit (1996), the deposits gathered through NCDs shall be subject to deposit reserve requirements. Therefore, the NCDs may be considered as regular deposits and count toward the loan-to-deposit ratio, which make them very attractive to the small and medium-sized joint-stock banks that are struggling with the loan-to-deposit ratio.



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