Banks lowered their exposure to mutual funds (MFs) by 27 per cent, or Rs 33,705 crore, during the fortnight ended July 3 to avoid setting aside funds to meet the capital adequacy norm.
According to data released by the Reserve Bank of India on Friday, banks’ combined investment in MF instruments fell to Rs 89,472 crore at the end of July 3, as against Rs 1,22,547 crore at the end of the previous fortnight. A year ago, banks had invested Rs 36,779 crore in these instruments. Over the last 12 months, growth in credit has dropped from 25.5 per cent to 16.3 per cent.
Though bank lendings rose to Rs 28,000 crore in the last fortnight, bankers said the main reason for the fall in their MF exposure was their need for funds to meet the capital adequacy norms at the end of the quarter. Banks do this at the end of every quarter since MF investments carry a risk weight of 100 per cent basis points. Other instruments such as call money carry a risk weight of 20 basis points.
Banks announce capital adequacy ratio (CAR) at quarter end. They have to put aside additional capital or make provisions for
Capital adequacy ratio is a ratio of banks’ capital to its risk and determines the capacity of the bank in order to meet the liabilities and other risks.
Over the last six months, banks have continuously parked around Rs 1,00,000 crore in mutual fund instruments saying that there was low demand for funds. Some fund house chiefs have, however, said that banks were playing safe by investing money in instruments issued by mutual funds, which in turn subscribed to papers issued by companies including real estate players top whom banks were reluctant to lend. “While banks compromise on returns, they pass on the risk to the fund houses, which are always trying to boost the assets under management,” said the managing director of a large fund house.
After liquidating a part of investment in these instruments, banks are deploying extra surplus in call money market or the reverse repo window. Call rates are hovering in 4-4.5 per cent while reverse repo rate is 3.5 per cent at present. On Friday, banks parked Rs 1,09,000 crore with RBI through the reverse repo window, which is used to suck out excess liquidity from the system.
