Banks park Rs 1L crore with MFs in April-July

Poor Credit Demand Forces Banks To Invest Idle Cash WITH demand for credit sluggish, banks have invested a record Rs 1 lakh crore in mutual funds between April and July 2009, nearly three times the amount they lent during the same period.      Banks have continued to invest in mutual funds although Reserve Bank of India guidelines prescribe a higher capital requirement for such investments compared to government bonds. One reason for this could be that banks are choosing to remain liquid in anticipation of a hardening in interest rates, which may push down the value of their government securities portfolio.      Indian Banks' Association chairman MV Nair attributed the rise to weak credit demand. "We have seen sanctions going up, but borrowers have still not availed of their limits. As a result, loans have not picked up. In such a situation, banks are parking their funds in other avenues and balancing their portfolio between government bonds, mutual funds and reverse repo with the central bank depending on market conditions and business priority of individual banks," said Mr Nair, who is also the chairman of Union Bank of India.      According to latest RBI figures, incremental investment by banks in mutual fund schemes rose Rs 1,02,838 crore between April and July 2009, taking their outstanding exposure to Rs 1,39,619 crore as on July 31. This is in addition to Rs 1,69,000 crore parked in government bonds. Total bank credit, on the other hand, rose only Rs 31,483 crore during the same period. Banks have mobilised deposits worth Rs 2,35,281 crore during the same period. On a year-on-year basis, loans grew by around 15% until end-July while deposits have risen by 22%. Most investments in liquid schemes  BULK of MF investments by banks are in various liquid schemes or what is popularly known as ultra short-term debt funds. These funds' portfolio consist of short-term money market instruments such as treasury bills, commercial papers and certificates of deposit. According to Crisil Fund Services director Krishnan Sitaraman, "The return on such schemes is around 5% compared to 3.25% that a bank earns by parking in reverse repo with the RBI or even the intrabank call money market." In fact, in the past two months, yields on treasury bills have increased by 100 bps to around 4.36% in the last auction.Although longer tenure government bonds generate a higher return, the market risk is also higher. There is a general expectation that interest rates will harden given the quantum of government borrowings envisaged this year. If they do harden, the prices of government securities issued earlier will fall as newer securities become more attractive investments. Money market instruments are, however, less sensitive to interest rate changes.      Mr Sitaraman said there could be some withdrawals towards end-September as banks need to manage capital adequacy requirements. Also, funds requirement to make advance tax payments could trigger withdrawals from MFs. Based on past trends, inflows could start once the new quarter begins, he added. The situation, according to Mr Nair, may change once credit starts picking up. The better-than-expected GDP numbers has led to optimism there could be a pick-up in loan demand from the second half, he said.