Aided by a slump in credit growth, banks investment in mutual funds (MFs) went up by Rs 60,659 crore during the fortnight ended January 15.
According to the latest data by the reserve Bank of India (RBI), their investment in MF stood at Rs 103,087 crore at the end of January 15 from Rs 42,428 crore at the end of January 1. During the period, bank credit declined by Rs 11,898 crore.
After the central bank expressed reservations over banks’ MF exposure, it was anticipated that banks would withdraw from the segment.
During the last fortnight ended January 1, banks had withdrawn Rs 104,851 crore from MFs in order to avoid higher provisioning to meet the capital adequacy ratio, since these instruments carry a high risk weight of 125 per cent.
“Until credit demand picks up, banks will continue to invest in mutual funds. The hike in CRR may not affect banks’ investment in MF, as there will be enough liquidity even after Rs 36,000 crore will be sucked out,” said a senior executive of a public sector bank.
MF players also expect banks’ investment to continue till credit offtake picks up. “The CRR hike may not impact banks’ investment in MFs. Liquid schemes gives them better returns compared to other instruments available to them for investment,” said Ashish Kumar, fund manager at LIC Mutual Fund.
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Liquid schemes are offering 4.13 per cent return, while reverse repo is giving only 3.25 per cent. Banks park surplus funds in MFs, reverse repo or call money market. Banks were parking in excess of Rs 60,000-70,000 crore in reverse repo during the last one week. Today, banks parked Rs 38,860 crore in the reverse repo window.
As the demand for funds remained low, credit grew by 13.88 on a year-on-year basis at the end of January 15. Though RBI has lowered the credit growth target to 16 per cent, but to meet even this target, banks will have to lend an additional Rs 198,000 crore by the year-end. Bankers expect MF investments to drop in early March when credit demand will pick up and the increase in CRR is implemented.