Despite advisory, banks park funds with MFs

In spite of the Reserve Bank of India (RBI) missive advising banks to reduce their exposure to mutual funds (MFs), banks pumped in an additional Rs 6,261 crore in these instruments in the week up to November 6. The total outstanding investment by banks in MFs stands at Rs 1,60,483 crore compared with Rs 36,781 crore on March 27.

“Credit growth is still subdued while deposits are growing at a much faster pace. The only other option for banks is to park funds in SLR securities, but bond yields have been volatile in the last quarter, posing mark-to-market risks. Liquid mutual funds do not have that risk,” said the treasury head of a private sector bank.

Bank of India Executive Director M Narendra said the high level of investment in MF schemes was a reflection of huge surplus liquidity with banks since credit offtake did not pick up. The investments are across short-, medium- and long-term debt funds. The spike in banks’ exposure to MFs over the past few months prompted the central bank to sound a note of caution in the second quarter review of the monetary policy.

A part of the worry emanated from the experience last year, when MFs had come under strain when the global financial crisis intensified after the collapse of Lehman Brothers in September 2008.

Bankers said they were taking various steps to ensure that they did not fell foul of the advisory.

While large banks were planning to cap their MF exposure at 20 per cent of total investments, smaller banks were limiting such investments to Rs 1,000 crore, executives at public sector banks said.