Wary of lending, banks park Rs 16,510 cr in MFs

The mutual fund industry had a gold rush in April as banks rushed to park funds in liquid schemes.

The reason: According to the Securities and Exchange Board of India’s (Sebi) guidelines which came into force from May 1, liquid funds will no longer be allowed to invest in securities of over 90 days. That means that returns from these funds would come down as they would not be able to invest in papers of longer tenure, which are riskier in nature, but give better returns.

Banks’ investment in mutual funds instruments increased by Rs 16,510 crore to Rs 1.02 lakh crore during the second fortnight of the financial year. Last year, during the same period banks had withdrawn Rs 6,312 crore from mutual funds.

While investments in funds have risen, credit offtake of banks continued to languish. In fact, bank credit declined by Rs 25,266 crore in the second fortnight. Bankers said that the fall was due to a lack of demand from both retail and the corporate sector.

With the Sebi guidelines kicking in from May 1, banks would prefer to look at these schemes because funds can still invest in longer-term papers that give higher returns. Returns from liquid funds come in the range of 5.75-6 per cent.

This is much more than returns in the call money market or from the reverse repo window. At present, call rates are hovering around 0.75-3.30 per cent, while reverse repo rate is 3.25 per cent.

“There aren’t many avenues for banks to deploy their surplus funds. Given that returns from mutual funds are higher compared to certificate of deposits (CDs), commercial paper (CPs) and call money market, it makes sense to invest in these schemes,” said a senior public sector bank executive.

During the fortnight, deposits grew by Rs 21,936 crore to Rs 39,23,005 crore at April-end. However, deposit rates have come down to 7.50-9.60 per cent from 11-12 per cent, indicating that there is enough liquidity in the system.

Investment in securities, qualifying for maintenance of statutory liquidity ratio, has dropped by Rs 12,359 crore as some banks are well above the mandatory limit.