Banks pull out Rs 500b from MFs after Mar 15
Tuesday, 30 March 2010
MUMBAI, Mar 29 (Economic Times): Banks have liquidated mutual fund investments of over Rs 500 billion in the second half of March to improve their balance sheet. Some banks need money to lend to corporates while others are liquidating MF investments to avoid pressure on capital requirements.
Speaking on condition of anonymity, fund managers said banks have pulled out over Rs 500 billion from mutual funds since mid-March. Data over the last two years show that banks have in both years exited mutual fund investments towards the end of a quarter only to reinvest them when the new quarter begins.
For example, in the last week of September 2009, banks withdrew Rs 890 billion only to pump back over Rs 600 billion in the first week of October. Another reason for withdrawing funds just before the quarter ends is that this period sees a cash crunch arising out of withdrawals for advance tax payment by businesses.
This year, banks are also under pressure to shore up loans as most of them are falling short of the credit targets set by RBI. As on March 12, banks had Rs 1080 billion in mutual funds. This was five months after RBI asked them to contain such investments.
The central bank in its October policy said such investments had a circular nature where banks invested in MFs, who in turn lent to banks in the money markets. Such circular investments are profitable to banks as no tax is deducted on investments in mutual funds. To break this circularity, RBI imposed a cash reserve requirement for bank borrowings through collateralised markets.
Besides the tax arbitrage, banks have been investing in mutual funds because of the lack of demand for credit. Bulk of the funds are parked in various liquid schemes or what is popularly known as ultra short-term debt funds. The funds are deployed in various short-term money market instruments such as treasury bills, commercial papers and certificate of deposits.
Speaking on condition of anonymity, fund managers said banks have pulled out over Rs 500 billion from mutual funds since mid-March. Data over the last two years show that banks have in both years exited mutual fund investments towards the end of a quarter only to reinvest them when the new quarter begins.
For example, in the last week of September 2009, banks withdrew Rs 890 billion only to pump back over Rs 600 billion in the first week of October. Another reason for withdrawing funds just before the quarter ends is that this period sees a cash crunch arising out of withdrawals for advance tax payment by businesses.
This year, banks are also under pressure to shore up loans as most of them are falling short of the credit targets set by RBI. As on March 12, banks had Rs 1080 billion in mutual funds. This was five months after RBI asked them to contain such investments.
The central bank in its October policy said such investments had a circular nature where banks invested in MFs, who in turn lent to banks in the money markets. Such circular investments are profitable to banks as no tax is deducted on investments in mutual funds. To break this circularity, RBI imposed a cash reserve requirement for bank borrowings through collateralised markets.
Besides the tax arbitrage, banks have been investing in mutual funds because of the lack of demand for credit. Bulk of the funds are parked in various liquid schemes or what is popularly known as ultra short-term debt funds. The funds are deployed in various short-term money market instruments such as treasury bills, commercial papers and certificate of deposits.