Banks’ investment in mutual fund (MF) instruments hit a five-year high of R80,299 crore during the fortnight ended September 16, data released by the Reserve Bank of India (RBI) reveal.
However, the same is more than 50% less than what it was in late 2009.The rise in banks’ investment in MF instruments is most likely a function of fresh investments by public sector banks (PSBs) that are grappling with stressed loan books and low credit demand from the industry.
Bank credit to the industry, for instance, fell 0.2% (Y-o-Y) in the fortnight ended August 19. Banks’ investment in commercial papers (CPs) and private sector bonds and debentures, on the other hand, jumped 56.5% and 17.7% (Y-o-Y), respectively, during the same fortnight.
A detailed FE analysis reveals that the combined non-SLR investments of four of the top five PSBs – Punjab National Bank (PNB), Bank of Baroda (BoB), Bank of India (BoI) and Canara Bank – as a share of their total investments rose 190 bps (y-o-y) to 16.2% during the quarter ended June.
Given that non-SLR investments of these four banks grew 5.2% (y-o-y) during the quarter while their loan books shrank 3.9% (y-o-y) during the period indicates that the former came at the expense of the latter.
Non-SLR investments of banks include investment in corporate bonds, commercial papers, mutual funds and equities, etc.“Given the high credit costs of PSBs, it’s only logical that they concentrate on high-quality investments, instead of advances, until they get a grip on their ballooning non-performing assets (NPAs),” said an analyst at a leading foreign brokerage.
Credit costs are provisions set aside by banks for bad loans as a percentage of their total loan book.Analysts are also of the opinion that such a strategy to invest in funds instead of lending them is not advisable in long run, though is a compulsion at times. “Most PSBs are continuing to see growth in deposits, but the entire focus of their top management is on recovery of bad loans. In such a scenario, I think it makes sense for them to invest in high-quality corporate bonds and even equities and MF units, given the buoyancy in the market, instead of lending more to already stressed large corporates,” said a banking analyst at another leading brokerage.