Debt schemes to be hit by Finmin diktat on bulk deposits

Debt schemes of mutual funds are likely to be hit by the recent finance ministry diktat to state-owned banks to reduce their dependence on bulks deposits, including certificates of deposit (CDs).

Last month, the finance ministry asked public sector banks (PSBs) to cap bulk deposits at 10 per cent of total deposits by the end of this financial year. Further, it asked banks not to bid aggressively for CDs, a practice they adopt at the end of every quarter.Debt fund managers said banks will now resort to lower issuances of CDs, forcing them to look at alternative avenues for deployment of funds and also result in softening of yields on short-term paper.

Currently, mutual funds have about Rs 4.5 lakh-crore worth of debt assets, of which more than half is invested in bank CDs.

“Mutual funds might face issues getting CDs to invest in. Fund houses will have to shift to other instruments like CPs (commercial paper). CDs may not be the huge component for debt schemes, going forward,” said Dwijendra Srivastava, head – fixed income, Sundaram Mutual Fund. Added Mahendra Jajoo, executive director and head of fixed income at Pramerica Mutual, “Already, we have seen CD rates come down, as banks have good liquidity due to lower credit offtake. But there will be further downward pressure on yields of both CDs and CPs.”

Already, yields on three-month CDs have dropped to 8.35 per cent, the lowest in more than a year. Yields on three-month CPs also declined to near two-year lows of 8.5 per cent.

Re-issuances of CDs are high in September on quarter-end demand for funds by banks, due to the half-year closing of accounts. Rates also tend to harden during this time as liquidity is in deficit. However, this time around it could be different. “There is enough liquidity in the system and banks may renew only a small portion of CDs, which may be maturing in the next few weeks. These will get renewed at lower rates than before,” said N S Venkatesh, chief general manager (treasury) with IDBI Bank.