Money & Banking

Banks invest more in mutual funds as returns go up

K. Ram Kumar Priya Nair Mumbai | Updated on March 07, 2011

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The returns being offered by the liquid schemes of mutual funds appear to be too juicy an opportunity for banks to ignore.

In the January 1 to February 11 period alone, banks have poured Rs 81,535 crore into the liquid schemes. This is despite the slow growth in deposits and the persistent liquidity tightness as reflected in the banks' daily borrowing from the Reserve Bank of India.

Banks are eyeing an arbitrage opportunity of up to 200 basis points (one basis point equals 0.01 per cent) by deploying funds in the liquid schemes, according to analysts. Mutual funds invest the corpus in these schemes predominantly in Government securities and money market instruments (commercial papers, certificates of deposit, Treasury-bills, short-term bank deposits, etc).

Borrow from repo window

Banks are resorting to borrowing either from the RBI's repo window at 6.50 per cent or the overnight interbank call money market at around 6.50-7 per cent or the collateralised borrowing and lending obligation (of Clearing Corporation of India Ltd) at around 6-6.80 per cent and deploying the resources with mutual funds to earn a spread of 8 per cent or more.

This investment comes even as the RBI has, in the recent past, cautioned banks to be careful in their exposure to mutual funds as the latter tend to invest in certificates of deposits (CDs) issued by the former in a big way. Market players say there is always a lurking fear of liquidity risk should banks suddenly press mutual funds for redemption.

CDs are negotiable money market instruments, issued by banks, of Rs 1 lakh face value and maturity of up to one year.

According to the latest RBI data, banks have issued CDs aggregating Rs 1,13,394 crore between January 1 and January 28 to offset the slowdown in retail deposit growth. Currently, banks, on an average, are raising one-year CD at a coupon rate of about 10.15 per cent.

“Banks are investing in MFs because the incremental liquidity is better and the returns from MFs have improved. The returns, which were around 6.5 per cent four months ago, are now above 8 per cent. So, banks can borrow from the call market at 6.5 per cent or from RBI's repo window and invest in MF schemes to earn substantially higher returns. That is the incentive,” said Mr Maneesh Dangi, Head Fixed Income, Birla Sun Life AMC.

In the financial year so far (up to February 11), the gap between bank deposits and advances growth has widened. While deposits have grown at a slower clip of 12.2 per cent (12.5 per cent in the corresponding period last year), advances have surged by 16.6 per cent (10.1 per cent).

Published on March 06, 2011

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