India Inc's investments in mutual fund schemes have seen an increase as most banks have been refusing bulk deposits due to the high interest rates they have to offer.
A senior official of a PSU bank said that rising interest rates have put pressure on net interest margins of banks, forcing them to reduce exposure to bulk deposits. As a result, corporations are turning to mutual funds to park their money.
The banking sector's net interest margin is in the 3-3.5 per cent range, say banking analysts. Though most banks have been maintaining these levels, margins are slowly being eroded and is a cause for concern, they said.
It is noteworthy that the RBI has hiked interest rates 12 times – 325 basis points on a cumulative basis - since March 2010 According to data sourced from the Association of Mutual Funds in India, for the period September 2010-March 2011, the average monthly contribution of liquid schemes to the total assets under management (AUM) of the industry was about 17 per cent and that of the income schemes was about 48 per cent.
The net interest margins of banks, according to analysts, have been under pressure since April. From April onwards, the average monthly contribution of liquid schemes to the total AUM increased to 24 per cent, while that of the income schemes declined to 45 per cent.
While fund officials agree that banks have “not been aggressively” accepting bulk deposits from corporates, they do not believe that the interest rate hikes have seen any additional investments in mutual funds from corporates.
“Corporates have always been parking money with mutual funds. However, at the end of every quarter, corporates prefer to park money with banks, only to later invest them back into mutual funds at the beginning of the next quarter,” said the head of fixed income of an Indian mutual fund.
Banks, on the other hand, have been reducing their exposure to mutual funds, following an RBI guideline asking banks to invest only 10 per cent of their networth in mutual fund schemes. Banks have been given time till December of this year to comply with the guideline. So, to that extent, the contribution of corporates may have increased when compared to that of banks, say fund house officials.
“In spite of the new regulation, banks continue to aggressively put money into mutual fund schemes. However, this may be the last quarter where we see such heavy investments from banks,” said Mr Mahhendra Kumar Jajoo, Executive Director, Chief Investment Officer - Fixed Income, Pramerica Asset Managers.
Fund officials add that the increase in investment in liquid schemes was also due to the mark-to-market regulation passed by SEBI in August 2010. Marking to market is the valuation of securities on a daily basis at the day's closing price. This regulation led to an increase in investment in liquid schemes (and away from income schemes) as they hold no mark-to-market instruments and therefore face no capital loss. Non-liquid schemes hold mark-to-market instruments, which increase the possibility of capital loss for its investors.
Another trend in the industry is the increase in the contribution of the SME sector and the HNIs to the liquid schemes, owing to the interest rate hikes. According to Mr Jajoo, the average monthly contribution of the SMEs and the HNIs together was around Rs 1000 crore for the industry.