Banks may park excess funds in short-term debt instruments

Banks are expected to step up investment of their surplus funds in short-term debt instruments such as commercial papers, treasury bills, and government securities with one-two years residual maturity. This is to address the Reserve Bank of India’s concerns over circular movement of liquidity from banks to the liquid schemes of mutual funds (MFs) and vice-versa. The central bank’s apprehension over circular movement of funds stems from the fact that should liquidity start drying up (on the back of improved credit pick-up) banks would redeem their mutual fund investments to shore up their funds position. Faced with redemption pressure, MFs would then resort to heavy borrowing via Clearing Corporation of India Ltd’s collateralised borrowing and lending obligation (CBLO) facility, thereby putting upward pressure on CBLO as well as call money rates. Bankers hold the view that the RBI’s “banks should lend directly to corporates and not through the intermediation of mutual funds” message implies that the central bank is anxious about the systemic implications of the circular movement of liquidity. According to Mr. Arun Kaul, Executive Director, Central Bank of India, once the board approves internal prudential limits for investment in mutual fund schemes so as to mitigate risks, banks will actively invest in short-term debt to manage their short-term liquidity. According to industry observers, a good chunk of the over Rs 1 lakh Cr. excess liquidity parked by banks in liquid schemes of mutual funds could find its way into short-term debt instruments. Tepid credit appetite in the economy in the financial year, so far, has forced banks to make large investments in government securities and also fairly sizeable investments in units of mutual funds. Credit pick-up in the financial year up to October 9 at Rs 1,14,766 Cr. is less than half the off-take (Rs 2,47,775 Cr.) during the corresponding period last year. Hence, banks had no choice but to collectively channelises their daily surplus aggregating over Rs 1 lakh Cr. to the low-yielding RBI’s reverse repo window. Further, banks also invested Rs 2,11,500 Cr. in the financial year up to October 9 in government securities (Rs 6,169 Cr. in the corresponding year ago period) and deployed Rs 1,28,772 Cr. in liquid scheme of mutual funds (Rs 9,079 Cr.).