Banks cut exposure to liquid instruments
11 Apr 2009
With banks having to set aside capital to comply with the capital adequacy ratio (CAR) guidelines, they have cut down their exposure to liquid funds in order to avoid additional provisioning for investments in such funds, typically mutual fund instruments, by 46.24 per cent to Rs45,134 crore during the last fortnight of the financial year 2008-09, as against Rs83,964 crore in the previous 14-day period ended 13 March.
CAR is the ratio of a bank's capital to its risk and determines its capacity to meet liabilities and other risks. Under Basel II norms, banks have to maintain a minimum capital adequacy ratio of 9 per cent, though most Indian banks are closer to the 12 per cent level.
Typically, banks do not pull out their investments at the end of a quarter, but do so at the end of March.
Investments made in liquid and income funds floated by asset management companies carry a risk weightage of 100 per cent, as against 25 per cent for money market instruments. Therefore, banks have to set aside more capital for these funds.
During the fortnight under review, banks' advances rose to Rs79,498 crore, as against Rs22,423 crore a fortnight earlier.
| FUND FLOW Bank investment in MF instruments (Rs cr) | |||
| Month | 2007-08 | 2008-09 | Growth (%) |
| September | 39,291 | 10,759 | -72.62 |
| October | 70,644 | 16,659 | -76.42 |
| November | 47,132 | 34,237 | -27.36 |
| December | 59,456 | 44,955 | -24.39 |
| January | 50,376 | 68,810 | 36.59 |
| February | 41,197 | 90,109 | 118.73 |
| March | 18,692 | 45,134 | 141.46 |
| Source: RBI | |||
Banks have deployed their surplus either in the call money market or through the reverse repo window. Call rates are hovering in the 4-4.5 per cent range, while reverse repo rate is 3.5 per cent.
However, bankers reportedly said that the surplus funds would flow back into these instruments, as their returns are higher than call and reverse repo rates. It was this aspect which had already attracted the lenders earlier.