Banks' exposure to MFs sees sharp fall

Banks lowered their exposure to mutual funds (MFs) in the last fortnight of 2009-10 to meet year-end capital needs.

In a span of 14 days, banks’ investments in MF instruments came down by Rs 53,014 crore to Rs 55,502 crore during the fortnight ended March 26, as against Rs 108,516 crore in the previous fortnight, according to the Reserve Bank of India (RBI) data.

The main reason: Lenders have to disclose their capital adequacy ratio (the ratio of capital to risks) at the end of a financial year. This determines the capacity of banks to meet liabilities and other risks.

Banks’ investments in MFs had risen to around Rs 170,000 crore in the first fortnight of December 2009. In October last year, RBI had expressed concern over banks’ huge exposure to MF instruments.

“Banks have withdrawn money from liquid instruments. They deploy surplus funds in the overnight market and the reverse repo window. MFs face huge redemption pressure as banks will be reluctant to take additional risks,” said a senior executive of a public sector bank.

Apart from meeting capital norms, banks lend more in the last fortnight of a financial year to meet credit growth targets. As against the credit growth target of 16 per cent for the last financial year, banks clocked 16.7 per cent growth at the end of March 26.

During the fortnight, deposits grew by Rs 83,631 crore. Since bank credit went up by Rs 115,548 crore, their investments in securities qualifying for statutory liquidity ratio dropped by Rs 4,253 crore.