Bank investments in mutual funds cross Rs1 lakh crore in March

Investments by banks into mutual funds rose 23% to Rs105,650 crore for the fortnight ending March 11, compared with Rs85,717 crore in the two weeks preceding that date, data released by the Reserve Bank of India (RBI) on Friday show.

It is after a gap of 21 fortnights that banks have invested in six figures into mutual funds — to be precise, Rs110,157 crore in the fortnight ended May 21, 2010.

“The net liquidity position of banks was comfortable at the beginning of March due to which they had invested in liquid funds which are giving good returns,” said R V S Sridhar, head of global markets at Axis Bank.

The net average borrowings of banks under the RBI’s daily liquidity adjustment facility stood at Rs60,068 crore in the fortnight ended March 11.

This was lesser than the net average borrowing of Rs86,213 crore in the fortnight ended February 25.

Things have changed a touch since, however.

According to Maneesh Dangi, head of fixed income, Birla Sun Life Mutual Fund, for the fortnight ended March 25, bank investments in mutual funds have dropped amid payment of the fourth instalment of advance tax and is expected to be in the range of Rs40,000 crore to Rs45,000 crore.

“By the end of this month it is expected to be around Rs20,000 crore,” Dangi said.

According to fund managers, this is because mutual fund investments carry 100% risk weightage. Banks move out of mutual funds every quarter to show better capital adequacy ratio. A higher ratio reflects a stronger balance sheet.   

“Banks would opt for redemption, which in turn will bring down the investment in mutual funds figure,” said VK Khanna, general manager (treasury and international banking division), Union Bank of India.
But only till April, say fundmen. They see higher liquidity leading to better inflows for funds.

“Investing in mutual funds is something which banks view more as an arbitrage option rather than an investment option — something the RBI would not like the banks to do. April should see more of arbitrage money than genuine investments,” said Ramanathan K, chief investment officer at ING Mutual Fund.