Low credit offtake pushes participation by banks in MFs

As per Amfi data, banks and institutions' contribution in liquid and money mkt MFs was up 50% from March 2014

Sluggish demand for credit has led to higher participation by banks in mutual fund schemes during the first half of the current financial year.

The holdings of banks and financial institutions of liquid and money market schemes offered by mutual funds (MFs) has increased more than 50 per cent to Rs 13,037 crore during the April-September 2014 period, according to data provided by Association of Mutual Funds in India.

The assets under management (AUM) of banks in these schemes at the end of March stood at Rs 8,438 crore.

Industry officials attributed this growth in AUM to the low credit growth, which has left banks with higher investible surplus. “RBI has asked banks not to lend below the base rates, which makes bank credit less attractive than the other market lending instruments. Besides, banks have also become cautious and are also chasing good quality assets in such a distress situation,” said Dwijendra Srivastava, head of fixed income at Sundaram Mutual.

Banks and financial institutions account for seven per cent of the total AUM under liquid and money market funds as of September 2014, up from 6.3 per cent in March this year.

Non-food credit offtake at banks grew an average 12 per cent year-on-year between April and September 2014. The fortnightly credit growth rate had even declined to below 10 per cent last month.

Last September, banks and other financial institutions invested Rs 7,387 crore in liquid and money market funds.

The folio count of banks and financial institutions has moved up as well. While the absolute numbers are low, the folio count has seen an over 60 per cent growth to 681 folios this September compared to the 419 folios last year.

Fund managers believe that the Reserve Bank of India’s reluctance to cut interest rates delay the credit off take at banks. This could see higher investments into the liquid and money market fund category, industry officials said.

Some in the industry point out that while banks do park excess funds in the short-term liquid and money market in the normal course of business, the quantum had gone up recently in the absence of credit opportunities.

“When credit growth in the industry is low, bank money does come into these funds. In fact, liquid and money market funds would be a better option for banks to invest in than the overnight investment opportunities,” said R Sivakumar, head of fixed income and products at Axis Mutual Fund.

The returns generated by the liquid and money market funds are higher than those in the overnight instruments by about 40 basis points, experts said.

Returns on the overnight instruments are anywhere between 8.10 per cent and 8.15 per cent, while those of the liquid and money market funds are in the 8.40-8.60 per cent range.