Indian Banks

Banks’ exposure to mutual funds (MFs) fell around Rs 11,000 crore in the fortnight ended February 26, as lenders strove to meet year-end disbursal targets, aided by a rise in demand for credit.

According to the Reserve Bank of India (RBI) data, banks’ MF investments stood at Rs 1,09,453 crore at the end of February 26. Banks have maintained over Rs 1 lakh crore in MFs in the current quarter.

This is despite RBI expressing concerns about banks’ high exposure to MFs. RBI has asked banks to set limits for MF investments. On Friday, the government said RBI was reviewing the steps taken by banks to cut exposure to debt schemes of MFs. “At present, RBI is reviewing the measures initiated by banks in this regard and analysing movement of funds between banks and MFs,” Minister of State for Finance Namo Narain Meena said in the Lok Sabha. He said most banks had placed board approval limits on exposure to MFs.

Banks’ MF investments have risen significantly in the last few years. These are classified as capital market exposure and so cannot exceed 40 per cent of a bank’s net worth. Assets managed by MFs stood at Rs 767,000 crore at the end of February 28, of which debt schemes accounted for two-thirds. Banks account for a sizeable chunk of this figure. Banks park the surplus left after meeting the demand for credit in mutual funds, the call money market and RBI’s reverse repo window.

RBI Governor D Subbarao had advised banks against investing heavily in MFs during the half-yearly review of the monetary policy. Banks typically withdraw funds from MFs at the end of every quarter to meet capital adequacy requirements. MF investments carry a high risk weight of 150 per cent.

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According to the latest data by the reserve Bank of India (RBI), their investment in MF stood at Rs 103,087 crore at the end of January 15 from Rs 42,428 crore at the end of January 1. During the period, bank credit declined by Rs 11,898 crore.

After the central bank expressed reservations over banks’ MF exposure, it was anticipated that banks would withdraw from the segment.

During the last fortnight ended January 1, banks had withdrawn Rs 104,851 crore from MFs in order to avoid higher provisioning to meet the capital adequacy ratio, since these instruments carry a high risk weight of 125 per cent.

“Until credit demand picks up, banks will continue to invest in mutual funds. The hike in CRR may not affect banks’ investment in MF, as there will be enough liquidity even after Rs 36,000 crore will be sucked out,” said a senior executive of a public sector bank.

MF players also expect banks’ investment to continue till credit offtake picks up. “The CRR hike may not impact banks’ investment in MFs. Liquid schemes gives them better returns compared to other instruments available to them for investment,” said Ashish Kumar, fund manager at LIC Mutual Fund.

Liquid schemes are offering 4.13 per cent return, while reverse repo is giving only 3.25 per cent. Banks park surplus funds in MFs, reverse repo or call money market. Banks were parking in excess of Rs 60,000-70,000 crore in reverse repo during the last one week. Today, banks parked Rs 38,860 crore in the reverse repo window.

As the demand for funds remained low, credit grew by 13.88 on a year-on-year basis at the end of January 15. Though RBI has lowered the credit growth target to 16 per cent, but to meet even this target, banks will have to lend an additional Rs 198,000 crore by the year-end. Bankers expect MF investments to drop in early March when credit demand will pick up and the increase in CRR is implemented.

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Banks withdrew heavily from mutual funds (MFs) in the last fortnight of December. The reason: High credit growth and provisions for liquid funds at the end of the quarter.

According to the Reserve Bank of India (RBI) data, banks withdrew Rs 1,04,851 crore from MFs during the fortnight ended January 1 and their MF investments now stand at Rs 42,428 crore.

Credit offtake grew Rs 79,000 crore during the period while deposits grew Rs 82,769 crore (fastest since January 2008).

Banks either lend their surplus funds or invest in instruments like mutual funds, reverse repo and call money. Since credit demand has revived over the last four fortnights, banks have been reducing their investments in liquid schemes of mutual funds, which fetch returns of close to 4.31 per cent. Call rates are at 2.10-3.35 per cent while the reverse repo rate is 3.25 per cent.

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With bank FDs offering little, the risk-averse need to check company deposits or even balanced MFs.

With inflation on the rise, risk-averse investors who prefer parking their money in bank fixed deposits will soon find themselves in a fix.

The returns on offer from banks are now quite low. Most private and public sector banks’ one-year fixed deposit rates are between 6 per cent and 6.25 per cent. For instance, State Bank of India, ICICI Bank and Canara Bank offer a one-year deposit at 6.25 per cent. HDFC Bank is offering one-year deposits at 6 per cent.

The inflation rate in November had already reached 4.78 per cent. Last month, C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, had reportedly said the rate is likely to reach 7 per cent by March. In which case, getting yourself locked into deposits that are offering 6-6.25 per cent isn’t good policy. In such a scenario, financial advisors say even risk-averse investors need to look at other avenues, that will give inflation-adjusted returns of 4-5 per cent at least.

One answer could lie in company deposits and balanced funds. “A number of investors, who are unwilling to take higher risk, yet want to earn safe returns, have been consistently parking funds in fixed deposits of good companies,“ said C Saravanan, president, Bluechip India.

Well-known names such as Mahindra and Mahindra (M&M) and Jindal Steel and Power have issued fixed deposits at more attractive rates. M&M is offering an annual rate of 8.5 per cent, while Jindal Steel’s rate is 8 per cent.

If that’s not enough, you can opt for mid-caps and non-banking finance companies, that offer rates as high as 9-10 per cent. Examples of such companies are KCP (10 per cent); Pudumjee Pulp (9 per cent) and Dewan Housing (8.9 per cent).

“But before investing in company deposits, investors need to understand that as the rate of return goes up, so do the risks. When investing in such companies, a proper check on their financial health needs to be done,” said Gaurav Mashruwala, a certified financial planner.

There are several ways to judge the company’s financial health. For one, when a company seeks funds from you, instead of a bank, it is because the cost of funds would be cheaper.

For instance, if SBI’s prime lending rate is 11.75, it is much cheaper for a company if it can garner funds at 8-9 per cent from retail investors. But, if a company is willing to offer 14-15 per cent, it clearly has a problem in raising cash.

Similarly, if there is a large rate disparity between a company and a bank fixed deposit, one should avoid it. “Be wary of firms that have interest rates more than 5-6 per cent of the prevailing fixed deposit rates of large banks,” said a financial planner. In the current scenario, go for companies that offer rates below 10-10.5 per cent.

Then, one has to look at the ratings assigned to these company deposits by agencies such as Crisil, Icra and Fitch Ratings. Ratings of AAA or AA+ indicate the companies are in sound financial health.

While looking at the balance sheet could be a cumbersome process, if you are investing in a company that is offering surprisingly higher rates, take a look at its books. Parameters like profitability and the debt already on the books will give you a fair idea about its finances.

Taking all these steps is necessary because these deposits are unsecured. In other words, these deposits are not backed by any assets. If a company goes into liquidation, as has been the case many times, company deposit investors are treated as unsecured creditors The liquidator will first pay back the secured lenders, usually institutional bodies. After that, unsecured debtors are paid. Finally, equity holders will be repaid, because they are part-owners of the company.

Further, these deposits are not protected by any insurance, unlike banks. If a bank goes into liquidation, investors are assured that they will get back at least Rs 1 lakh.

Several companies have defaulted in the past. Known names who did this include Morepen Laboratories, DCM and Modern Industries, where such investors lost money.

Also, check the tax liability before investing in a company fixed deposit.

“Most of the time, FDs make little sense for people in the highest tax bracket,” said Brijesh Dalmia, director, Dalmia Advisory Services.

The average post-tax returns of short-term debt schemes or floating-rate debt funds are around 5-5.5 per cent.

For similar returns, a company deposit should give pre-tax returns of 8-8.5 per cent for people in the top tax bracket.

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