Liquid funds corner ICICI kitty

When the entire banking system was starved of liquidity in March, ICICI Bank, the country's second largest bank, was busy lending and investing in liquid funds of mutual funds (MFs).

Its exposure to mutual funds amounted to 13.1 per cent of the bank's capital funds of about Rs 20,000 crore at the end of March 2007.

Mutual fund industry ranks number one in the list of top 10 borrower exposures of ICICI Bank as a percentage of total capital funds as on March 31, 2007, according to the draft red herring prospectus filed by the bank with the Securities and Exchange Board of India (Sebi). 
 

Top 10 borrowers of ICICI	As % of total capital
Mutual funds	13.1
Electronics and engineering	10.8
Crude petroleum/ refining and petrochem	9.3
Crude petroleum/ refining and petrochem	8.9
Other metal and products	8.8
Electronics and engineering	8.7
Crude petroleum/ refining and petrochem	8.2
Crude petroleum/ refining and petrochem	8.0
Securitisation companies	7.6
Electronics and engineering	6.7

MFs borrowing from banks, in the form of lines of credit and repos, is a common practice. A MF avails of a line of credit from a bank to ensure liquidity support in case of sudden redemption pressure. The interest rate charged by banks for lines of credit are at negotiated rates, which range from seven per cent to 11 per cent.

"This is the bank's investment in liquid mutual funds. It's a liquidity management exercise. We had excess liquidity in March which was parked in seven to eight mutual funds. The exposure is captured as an industry exposure,'' said Vishakha Mulye, group chief financial officer, ICICI Bank. It is interesting to note that liquidity in the banking system was under pressure in March. This was on account of tax outflows and financial year-end pressures. Call rates (overnight lending rate) in March had touched a high of 80 per cent, according to the Reserve Bank of India data.

"ICICI Bank had excess liquidity funds as the bank had raised a lot of bulk term deposits at very high rates. Hence, in terms of liquidity they were well placed as compared to the rest in the banking system. They invested these deposits in liquid mutual funds which were giving an annual return in excess of 10 per cent in March,'' said banking sources.