Banks’ investments in mutual fund (MF) instruments jumped the most in over seven years in the fortnight ended October 14, data released by Reserve Bank of India (RBI) show. With an increase of R71,500 crore during the fortnight, banks’ total investment in MF instruments also hit an over five-year high of R86,423 crore.
The rise in banks’ investment in MF instruments is most likely due to 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) — its first fall in at least eight years — in the month ended August 19. Banks’ investment in commercial papers (CPs) and private sector bonds and debentures, on the other hand, are currently close to, if not at all time highs.
PSBs that have declared their September quarter results so far are only further validating such anaemic loan growth. Canara Bank, which announced its Q2FY17 results on Wednesday, for instance, reported just a 1.2% (y-o-y) rise in advances. Syndicate Bank reported an even lower 0.3% (y-o-y) rise in advances during the quarter ended September.
“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 the 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 funds instead of lending them, though not advisable in the long run, is at times a compulsion. “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.