Banks have continued to park surplus funds with mutual funds with incremental investments of close to Rs 60,000 crore since April.
The Reserve Bank of India data shows that bank investment in mutual funds stood at Rs 111,956 crore as on May 7. Banks essentially park funds in liquid mutual fund schemes as the return is a shade better than the return earned by deploying funds in the overnight call money market. Fortnightly trend in data shows that there is a secular rise in such investments over the past three fortnights.
According to Andhra Bank executive director Anil Girotra, this a pure fund management strategy by banks and surplus funds are deployed with mutual fund only until there are visible signs of pick-up in loan demand.
A recent report by Deutsche Bank notes that there could be demand for funds on account of payment of around Rs 67,000 crore as licence fee by telecos towards payment of license fees for 3G spectrum, besides another Rs 15000-20,000 crore toward the upcoming auction of the broadband wireless spectrum. In addition, there is a likely outgo of around Rs 30,0000-35,000 crore because of advance tax payments starting in the middle of June.
In total, assuming that only 75% of the 3G payments are made immediately, we could see over Rs 80,000 crore drained from the banking system.
Banks have in excess of Rs 100,000 crore parked in mutual funds (although it has come down noticeably in the last few months), part of which they are likely to divert towards lending to telecom companies, given higher yields on the latter. Besides treasury officials say government bond issues outstrip redemption in June.
According to a fund manager with a debt fund, any pick-up in loan demand will first result in pullout of surplus funds with RBI under its reverse repo facilities and only then would they pull out funds from mutual funds. “However, there could be some withdrawal pressure towards end June when corporates withdraw funds to make advance tax payments,” he added.
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