Mutual fund investments by the commercial banks may have an impact even beyond June as liquidity in the market is expected to tighten resulting in lack of investible surplus. Banks have been leaning more towards investing in money market instruments like certificate of deposits and commercial papers rather than parking their money in mutual funds after the Reserve Bank of India expressed its uneasiness regarding the issue last year.
Debjiban Basu, general manager (treasury, international banking & accounts) of the United Bank of India said, ?If 3G auction sucks out money from the system then there will be liquidity tightening. On the other hand, if there is tightening in liquidity, then much of CDs will not be available. I think there are possibilities that banks’ investment in mutual funds will be affected in near term.?
According to Karthik Srinivasan, senior vice president and co-head of financial sector rating ICRA, there could be a decline in bank’s investment in mutual funds during June. But that is also because of the fact that banks have other liabilities like advance tax and withdrawal by the corporate sector by June end.
? If there is credit pick up in excess of 20%, then there could be a reduction in liquid fund investments by the banks. That means liquid and ultra short term funds might not get many takers from the banking sector. Actually, it will depend more on how the base rates behave,? Srinivasan said.
Manish Sarraf, head (treasury) of the Dhanalaxmi Bank, feels that how the banks will behave depends on the time and liquidity horizon. ?There have been surrogate exposure to CDs and CPs by the banks, as mutual funds in turn park their money in such instruments.? While banks invest money in liquid or debt schemes, they on the other hand invest in instruments like certificate of deposits, commercial papers allowing banks to get tax exemption from the investments.
Ravi Trivedy, executive director of KPMG said, ?There will be credit off-take due to 3G auction. But that might not translate into liquidity crunch as it will be coming back into the system.?
? But there is also lack of good-quality CDs and CPs from the financial institutions. And if any of them default, then the situation will become dicey,? said Nilanjan Dey, director of Wishlist Capital Advisors Pvt ltd.
Brushing aside the fear of such defaults, Sarraf said, ?Default is not going to happen. But in near term investment instruments will largely be dependent on liquidity in the market.?