Banks depositing more funds in MFs due to lower loan off take

Although banks are reducing the interest rates on loans but the loan demand has to yet to pick up. Therefore banks are investing their surplus funds in mutual funds (MFs).

With loan demand yet to pick up, banks are parking a chunk of their surplus funds with mutual funds (MF). For the first fortnight of the current fiscal (FY10), banks have invested over Rs 40,000 crore in MF schemes thus the amount is over and above the Rs 80,000 crore they have invested into government bonds.

As per the latest figures given out by the Reserve Bank of (RBI), between March and April 10 commercial banks have collectively invested Rs 40,423 crore in various MF schemes, stimulating their total exposure to MFs to Rs 85,557 crore. The combined investment in government paper and other approved securities stands out to be Rs 82,074 crore. In comparison to this banks have lent only Rs 1429 crore in the fortnight.

Arvind Chari, fixed income portfolio manager of Quantum Mutual informed, “Banks cannot keep all their money in RBI’s daily money market operations since returns here are less than their cost of funds”. Banks make 3.25% through RBI’s liquidity window. He added, “Liquid funds that are fetching returns of 5-5.5% and short-term income plans delivering about 6% are a good alternative”.

Banks are compulsorily required to invest 24% of the deposits they raise in a fortnight in government and other qualified bonds. These investments are known as statutory liquidity ratio (SLR) investments. By April 10, banks had invested 7% extra (31% of deposits) in government bonds.

Of the non-compulsory investments, mutual funds appear to be the apparent choice for most banks.

Ashok Khajuria, head of treasury at IDBI Bank pointed out, “A bank may not have headroom to buy debt of another bank because of RBI regulations”. He added, “Mutual funds offer an easy and reasonably safe way to invest in such debt”. He explained that the rating agencies keep check on the MF investments which gives further comfort.

Majority of the banks have an internal policy for investing in MFs that place down in which fund houses the bank can invest and how much.

Bankers are of view that most of the investments are going into liquid schemes as these offers an instant exit with no penalty. Liquid funds make their profits by investing in treasury bills and bank CDs, in addition to lending in the CBLO market.

In October the interest rates were very high, thus the liquid funds delivered almost 9-10% returns. But, with RBI cutting rates in the past few months, their average annual returns have reduced to almost half of that figure.