Banks park money in MFs on dismal credit off-take

With credit off-take at an all-time low, banks are staying invested in liquid mutual fund instruments even as the quarter draws to a close.

According to data released by the Reserve Bank of India (RBI), investments by banks in mutual fund instruments in the fortnight up to June 5, 2009, increased by Rs 1,615 crore to Rs 1,22, 297 crore. In contrast, banks had lowered their exposure to mutual funds by Rs 3,313 crore in the corresponding fortnight last year.

Usually, banks redeem their mutual funds investments just before they close their accounts for the quarter to meet the capital adequacy ratio (CAR) requirements. Banks have to set aside more capital for mutual fund investments since they carry 100 per cent risk weight. On the other hand, reverse repos do not have a risk weight, while investments in call money market instruments carry a risk weight of 20 per cent.

Bank credit grew 15.68 per cent for the fortnight up to June 5, 2009, compared with the corresponding period in the previous year — the lowest year-on-year growth in over five years.

With credit off-take failing to pick up, banks have few other avenues to park funds and prefer mutual funds to low-return reverse repos.

“MFs carry 100 per cent risk weight as do bank advances. Since bank advances are not picking up, lenders are putting money in MF instruments, the only available window after the reverse repo,” said an official of a public sector bank.

“Usually, there is heavy pull by banks at the end of the year as credit demand in this period is very good. Banks lower their exposure to lend since the returns are higher than from liquid funds,” he added.

“Banks that are comfortable with their capital adequacy ratio do not need to bring down their exposure. Banks prefer deploying money in mutual funds rather than parking cash with the RBI. The problem is all of them are investing in short-term instruments and not taking a long-term call,” said a senior official of another bank.