In order to avoid additional provisioning for investments in liquid funds, banks lowered their exposure to such instruments issued by mutual fund (MF) houses by 46.24 per cent to Rs 45,134 crore during the last fortnight of the financial year 2008-09, as against Rs 83,964 crore in the previous 14-day period ended March 13.
Latest data released by the Reserve Bank of India today, however, showed that in March, investments in these instruments were 141.46 per cent higher than the corresponding period last year as credit growth slowed down and banks parked funds in instruments that earned them higher returns.
| FUND FLOW Bank investment in MF instruments (Rs cr) | |||
| Month | 2007-08 | 2008-09 | Growth (%) |
| September | 39,291 | 10,759 | -72.62 |
| October | 70,644 | 16,659 | -76.42 |
| November | 47,132 | 34,237 | -27.36 |
| December | 59,456 | 44,955 | -24.39 |
| January | 50,376 | 68,810 | 36.59 |
| February | 41,197 | 90,109 | 118.73 |
| March | 18,692 | 45,134 | 141.46 |
| Source: RBI | |||
Public sector bank executives said that the decline during the last fortnight of the year was the result of lenders having to set aside capital to comply with the capital adequacy ratio (CAR) guidelines.
CAR is the ratio of a bank’s capital to its risk and determines its capacity to meet liabilities and other risks. Under Basel II norms, banks have to maintain a minimum capital adequacy ratio of 9 per cent, though most Indian banks are closer to the 12 per cent level.
Typically, banks do not pull out their investments at the end of a quarter, but do so at the end of March.
Investments made in liquid and income funds floated by asset management companies carry a risk weightage of 100 per cent, as against 25 per cent for money market instruments. Therefore, banks have to set aside more capital for these funds.
“Bank credit had picked up in the last fortnight of FY09. Earlier, when the credit off-take was slow, banks started parking surplus cash in mutual fund instruments. If the call market picks up, banks may not invest in such MF instruments,” said Bank of India General Manager V K R Agrawal.
During the fortnight under review, banks’ advances rose to Rs 79,498 crore, as against Rs 22,423 crore a fortnight earlier.
Banks have deployed extra surplus either in call money market or the reverse repo window. Call rates are hovering in the 4-4.5 per cent range, while reverse repo rate is 3.5 per cent.
“Mutual funds have borrowed through the special window provided to them by the RBI in order to avoid redemption pressures. Some of them have established a line of credit with banks and availed of it,” said the treasury head of a large public sector bank.
However, bankers said that the surplus funds would flow back into these instruments as their rates are higher than call and reverse repo rates. It was this aspect which had already attracted the lenders earlier.
