Bank investment in MFs rises 8 times

Banks are parking funds not just in securities qualifying for maintenance of statutory liquidity ratio (SLR), but also in mutual funds (MFs).

After the global credit crisis intensified in September 2008 following the collapse of Lehman Brothers, investment in instruments issued by mutual funds dropped to Rs 10,759 crore (Rs 107.59 billion) – nearly 73 per cent from the level in the corresponding period in the previous year (see table).

But after several measures were initiated by the government and the regulators to restore confidence in fixed maturity plans and liquid funds, bank investments in these instruments at the end of February was estimated at over Rs 90,000 crore (Rs 900 billion). Of this, a bulk of the investments has flowed into liquid funds, bankers said.

The increased investments  in instruments issued by mutual funds has raised eyebrows as banks are seen to be risk-averse and are, therefore, opting to park funds instead of lending.

The risk-aversion has already prompted the government to convene a meeting of bankers since credit growth, on a year-on-year basis, has moderated from 29 per cent at the end
of October 2008 to 18.3 per cent at the end of February 2009.

Banks had the option to deploy the surplus funds in overnight market, where they could earn around 4 per cent, or park the funds in liquid funds, which earned 6-6.5 per cent. A third option was to deploy the extra cash through the Reserve Bank of India's reverse repo route and earn 3.5 per cent.

Besides, officials suspect that the banks are using the investment to get tax benefits and are seeking a review of the system so that it can only be restricted to individuals investing in mutual funds. But bankers said that investments in mutual funds attracted capital adequacy provisions and, therefore, banks would lower their investments in these instruments over the next 10 days.

"The process of liquidating a part of the investment in instruments issued by mutual funds has already begun and it will gather momentum in the remaining part of the week," said the head of fixed income with a fund house. "This investment is not at the cost of genuine demand for credit. The funds are invested in mutual fund schemes after their lending needs are met," added the head of treasury at a large public sector bank.