Mutual funds will soon have to learn to live without the comfort of huge pools of easy liquidity from banks. With RBI bearing down upon them, lenders have pulled out close to Rs 22,000 crore of funds invested in mutual funds until mid-December 2009. Bankers say withdrawals have continued into the second half, led by the demand for liquidity to meet growing credit demand.
Data released by RBI shows that banks’ investments in mutual funds have fallen by Rs 21,957 crore to Rs 147,279 crore as on December 18. This comes just a few days after RBI sought information on bank exposure to mutual funds.
The RBI had cracked the whip after it turned out that banks had continued to park money in mutual funds even after RBI governor D Subbarao had told bank chiefs to impose internal limits on their exposure to mutual funds as there was an element of circularity in these investments. What this means is that bank investments in mutual funds comes back to banks again in the form of investment in certificates of deposits or through lending under the Collatarised Borrowing and Lending Operations (CBLO).
RBI’s latest data shows that banks pulled money out of mutual funds and deployed them in other areas such as commercial papers, corporate bonds and the equity market. The exposure in these three segments rose to almost Rs 6,228 between November 6 (immediately after banks received a warning from RBI) and mid December.
In the same period, the bank’s exposure to the mutual fund industry fell Rs 13,500 crore. Part of the money withdrawn from fund houses was used to lend as credit rose sharply in the fortnight ending December 18.
Bankers are of the view that if demand for credit revives in the fourth quarter, they are likely to pull out more money invested in MFs. By mid-December 2009, credit rose Rs 20,000 crore, the highest in the last few fortnights.
Some state-owned banks have already introduced ceilings on such investments. Canara Bank has fixed a limit of Rs 6,000 crore, or 10 per cent of total investments while Oriental Bank of Commerce has fixed it at 10 per cent of investments, top officials in the two banks said. For Dena Bank and Indian Bank, the number stands at 15 per cent of the total investments. Officials in Bank of Baroda said they were considering linking the quantum of cap to total assets.
RBI governor had even termed banks investment in mutual funds as ‘circular trading’, whereby money that banks invested in mutual funds was finding its way back to banks. Bankers say in many cases, banks were seen investing in mutual funds which invested in the certificate of deposits issued by that bank. It is estimated that banks account for one-third investments made in liquid mutual fund schemes.
Meanwhile, RBI has sought more data average, lowest and the peak level exposure to mutual funds at various points of time. RBI has also wanted data on certificate of deposits (CD) issued by banks which are directly subscribed by mutual funds and money lent by banks to mutual funds, if any.
Source: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/finance/Banks-investments-in-MFs-decline/articleshow/5408272.cms
Data released by RBI shows that banks’ investments in mutual funds have fallen by Rs 21,957 crore to Rs 147,279 crore as on December 18. This comes just a few days after RBI sought information on bank exposure to mutual funds.
The RBI had cracked the whip after it turned out that banks had continued to park money in mutual funds even after RBI governor D Subbarao had told bank chiefs to impose internal limits on their exposure to mutual funds as there was an element of circularity in these investments. What this means is that bank investments in mutual funds comes back to banks again in the form of investment in certificates of deposits or through lending under the Collatarised Borrowing and Lending Operations (CBLO).
RBI’s latest data shows that banks pulled money out of mutual funds and deployed them in other areas such as commercial papers, corporate bonds and the equity market. The exposure in these three segments rose to almost Rs 6,228 between November 6 (immediately after banks received a warning from RBI) and mid December.
In the same period, the bank’s exposure to the mutual fund industry fell Rs 13,500 crore. Part of the money withdrawn from fund houses was used to lend as credit rose sharply in the fortnight ending December 18.
Bankers are of the view that if demand for credit revives in the fourth quarter, they are likely to pull out more money invested in MFs. By mid-December 2009, credit rose Rs 20,000 crore, the highest in the last few fortnights.
Some state-owned banks have already introduced ceilings on such investments. Canara Bank has fixed a limit of Rs 6,000 crore, or 10 per cent of total investments while Oriental Bank of Commerce has fixed it at 10 per cent of investments, top officials in the two banks said. For Dena Bank and Indian Bank, the number stands at 15 per cent of the total investments. Officials in Bank of Baroda said they were considering linking the quantum of cap to total assets.
RBI governor had even termed banks investment in mutual funds as ‘circular trading’, whereby money that banks invested in mutual funds was finding its way back to banks. Bankers say in many cases, banks were seen investing in mutual funds which invested in the certificate of deposits issued by that bank. It is estimated that banks account for one-third investments made in liquid mutual fund schemes.
Meanwhile, RBI has sought more data average, lowest and the peak level exposure to mutual funds at various points of time. RBI has also wanted data on certificate of deposits (CD) issued by banks which are directly subscribed by mutual funds and money lent by banks to mutual funds, if any.
Source: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/finance/Banks-investments-in-MFs-decline/articleshow/5408272.cms
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