Banks scale up investments in MF

After slashing investments in mutual funds in September amid liquidity crunch, banks have begun to increase their exposure to MFs by parking surplus funds in their schemes, according to Reserve Bank of India data.

Banks investments in instruments floated by mutual funds nosedived to Rs 9,124 crore at end of October 2008 from Rs 22,366 crore at end of August 29, 2008. These investments rose to Rs 13,630 crore on October 24 and went up further to Rs 16,659 crore as on November 07, 2008.

Treasury manager with small private bank said during September 2008 banks were facing pressure on resources. They liquidated investments in the debt oriented schemes of mutual funds to free up resources for banking operations. Also there were concerns over safety of funds parked in liquid scheme as many MFs were facing asset liability mismatch and risk of defaults.

Sensing liquidity crisis in money markets and for banks, Reserve Bank of India took slew of steps including cut in Cash Reserve ratio by 350 basis points. RBI also opened a special window for banks to borrow funds from it to provide liquidity support to mutual funds.

With much improvement in resource conditions, some banks saw themselves in position of surplus funds. Also stability returned to mutual fund house through October. On this backdrop, banks began to scale up investments in liquid funds of AMCs, said a dealer with bond house.

Meanwhile, the total investments by banks rose by 1.8 per cent (Rs 18,845 crore) to Rs 10,71,079 crore in fortnight ended November 07, 2008. The year-on-year growth in investment was 13.1 per cent while year to date (from April) was 10.2 per cent.