Lower investments in funds by Rs 6,145 cr in the fortnight ended March 13.

As financial year 2008-09 draws to an end, banks have started paring their exposure to mutual fund instruments, especially liquid funds, to manage their capital adequacy ratio.

Bankers said that they would continue to lower their exposure to mutual funds till March 31 to avoid any risk. At the end of a financial year, banks would not like to keep their capital locked or make additional provisions for their investments in liquid funds, they added.

While mutual fund instruments carry 100 per cent risk weight, call money market has 20 per cent and reverse repo does not have any.

Banks have to disclose their capital adequacy ratio at the end of every financial year. Capital adequacy ratio is the ratio of a bank’s capital to its risk and it determines the capacity of the bank to meet liabilities and other risks.

After liquidating a part of their investments in these instruments, banks are deploying the surplus in the call money market or the reverse repo window. Call rates are hovering around 4-4.5 per cent, while the reverse repo rate is 3.5 per cent at present.

“With banks withdrawing money from liquid fund instruments, mutual funds can face huge redemption pressure in the coming week. At the end of the year, bank will deploy funds in overnight market and in reverse repo,” said IDBI Gilts MD &CEO N S Venkatesh. The y-oy credit growth has lowered to 18.1 per cent at the end of March 13, 2009 against 21.9 per cent in the corresponding period of last year.

During the 14-day period ended March 13, deposit has dropped by Rs 3,363 crore. As a result, banks’ investment in securities qualifying for the maintenance of statutory liquidity ratio has dropped by Rs 3,819 crore. “After April 2, 2009, money will again start flowing into mutual funds, but they will feel redemption pressure for the next two-three days,” said the treasury head of a public sector bank.

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