Bangalore: With loan growth yet to pick up, banks have begun parking their surplus resources with mutual funds (MF). Till August 14, the mutual fund investments of both public and private sector banks stood at Rs 1.56 lakh crore, or an increase of Rs 1.36 lakh crore over the corresponding period of the last financial year.
Reducing your risk in a systematic manner
Bankers said that there were few alternative venues of investments. Since the beginning of this year, credit offtake amounted to just Rs 26,421 crore or a third of the previous year's figure. The incremental credit-deposit ratio for the year was barely 11 per cent against the previous year's figure of 57 per cent.
Bankers said that correspondingly banks were faced with large accumulation of deposits. Deposits since the beginning of this year have grown 22 per cent over the last year. Credit offtake grew only a measly one per cent over the last year.
MFs remain cautious on interest rate futures
A part of the deposit accretions is also on account of non-drawal of government borrowings during the year. Government borrowings are still parked with the public sector banks since expenditure is slated to be incurred only in the peak season.
G-sec saturation
The shift to mutual fund investments is also because banks are not interested in parking their entire funds in government securities. Banks already have a surfeit of Statutory Liquidity Ratio (SLR) securities. Currently, investments in government securities are about 34 per cent, way above the mandated SLR ratio of 24 per cent.
Besides, banks' interest in long-term securities also appears to have reduced, in view of the large portfolio with them. Consequently, there is a shift to other short-term instruments, including mutual funds.
The truth about mutual fund dividends
(The loss of interest in long-term securities is evident from the low investments in instruments issued by public financial institutions. Outstanding investments in such instruments were barely Rs 27,279 crore or an increase of just Rs 2,300 crore over the corresponding period of the last financial year.)
Better yields
Banks have also stepped up investment in mutual funds since MFs offered better yields. The yield on the one-year government securities, for instance, is barely 4.5 per cent. Mutual funds, however, are able to offer yields of 8 per cent, bankers said.
Mutual funds: Raising the exit bar for investors
Despite high risk weights in the case of investment in mutual funds (at 125 per cent), bankers are not worried because investments are mostly in public sector bank sponsored funds. Besides, the preferred funds are mostly in gilt funds where investment risks are low. Since some of the government borrowings and bulk funds are raised through Certificate of Deposit resources, banks preferred to park in money market MF so as to allow for a quick exit, when credit offtake picks up.
