While banks are wary of lending, they have stepped up investments in government securities and instruments issued by mutual funds.
According to the latest data released by the Reserve Bank of India on Friday, for the fortnight ended January 30, 66 per cent of the incremental demand and time deposits — amounting to Rs 25,596 crore — were invested in statutory liquidity ratio (SLR) instruments, which consist of government and other approved securities. During the fortnight, banks mopped up incremental deposits worth Rs 38,722 crore.
| BACK IN CIRCULATION | |
| Date | Bank investment in MF instruments |
| Oct-08 | Rs 4,506 cr |
| Nov-08 | Rs 11,521 cr |
| Dec-08 | Rs 10,718 cr |
| Jan-09 | Rs 23,855 cr |
During the last fortnight of October, which was immediately after the global credit crisis intensified, SLR investment had contracted though banks had mobilised over Rs 27,000 crore by way of demand and time deposits. In recent weeks, the SLR portfolio of the banking system has increased to around 28.9 per cent, as against 25.8 per cent in October.
In contrast, at the end of January, year-on-year credit growth was estimated at 19.3 per cent as against 29.8 per cent during the fortnight ended November 28.
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Credit flow has slowed down with the total bank credit seeing a decline of Rs 8,822 crore in the second half of January, which bankers said was due to lower demand for loans. The credit-deposit ratio has also declined from 75.01 per cent during the fortnight-ended October 24 to 71.86 per cent at the end of January.
With funding from the equities and overseas markets drying up, there was a shift of demand for funds to the banking system, which prompted RBI to revise the credit growth projection for the current financial year to 24 per cent, from 20 per cent that was estimated at the start of 2008-09.
The investment-deposit ratio, which had dropped to 30.18 per cent in October has gone up to 31.78 per cent. At the end of December, this ratio was estimated at 30.54 per cent. Even on the non-SLR investment front such as those in instruments issued by mutual funds, banks have stepped up their activity.
During January 2009, bank investment in instruments issued by mutual funds more than doubled to Rs 23,855 crore, compared with Rs 10,718 crore in December 2008. Immediately after September 15, when the global credit crisis intensified, banks had stopped investing in instruments issued by mutual funds prompting RBI and the government initiated special measures to encourage investment and check a systemic crisis.
In October, banks invested Rs 4,506 crore in instruments issued by mutual funds, while Rs 11,521 crore was invested in these papers in November.
“Investments in mutual funds are providing better returns compared to putting money in reverse repo. Right now, there is enough liquidity in the system which has created a temporary surplus for banks. We are parking this money in mutual funds,” said Union Bank of India General Manager for Treasury V K Khanna.
At present, mutual funds are generating 7-7.5 per cent return, as against 4 per cent when banks park surplus funds through the reverse repo window, bankers said.
Reverse repo is the liquidity adjustment tool used by the Reserve Bank of India to suck out excess cash.