Banks continue to invest in mutual funds, ignore RBI directions

The Reserve Bank of India (RBI) has told banks not to invest in mutual funds, mainly because the credit off take has still not improved, but they continue to give funds to asset management companies.

As per the latest RBI report, by fortnight ended November 20 the investments done by banks in MF schemes has increased from Rs 4,173 crore to Rs 1,64,656 crore. Banks invest very high amounts in the beginning of quarter and then withdraw funds at quarter end so that they do not require providing additional capital. And again they invest back the funds after the quarter ends.

Last month RB governor D Subbarao, in his monetary policy review had pointed out that bank investment in mutual funds have increased and their boards should put some limits on such investment.

Banks have invested funds with liquid mutual funds basically not only from their own surplus funds as lending was low, but have borrowed money from the collateralized borrowing and lending obligation (CBLO) at cheaper rates and later invested funds in mutual and also in RBI’s reverse repo scheme and earned a higher return. To stop such arbitraging, the central bank imposed a CRR of 5% for CBLO borrowings, which means the banks will have to keep aside more funds as cash so that they can invest with the central bank, in order to reducing their invested surplus.

According to bankers, banks are investing in MF due to poor credit off take. M Narendra, executive director, Bank of India, told after the RBI guidelines, banks have started re-looking at their strategies thereafter have revised their internal targets for mutual funds investments and sub-targets for various schemes. Thus, there can be measured increase in investments.

On the other hand some of the banks having ultra-floats (huge temporary surpluses) might have invested in liquid funds, he said. Anil Girotra, executive director, Andhra Bank said, “Many projects are still waiting to be executed because of which disbursals are delayed, though there may be sanctions, because of which banks could have surplus funds. Only those banks who have had temporary surpluses have deployed funds in liquid MF schemes rather than deploying in the overnight call money market.”