Despite Reserve Bank's advice to banks to reduce exposure in Mutual funds, banks parked additional funds worth Rs. 6,261 crore in the week ending November 6. With this the total outstanding investment by banks in mutual funds stands at Rs 1,60,483 crore as against 36,781 crore on March 27.

A treasury head of a privately held bank said, "Credit growth is still subdued while deposits are growing at a much faster pace. The only other option for banks is to park funds in SLR securities, but bond yields have been volatile in the last quarter, posing mark-to-market risks. Liquid mutual funds do not have that risk."

M Narendra, executive director, Bank of India said that such a large investment in MF schemes indicated a huge surplus liquidity in the banking system since the credit demand did not pick up.

The surge in banks' exposure to mutual funds prompted the apex bank to caution the banks against excessive parking of funds in such instruments. The mutual fund schemes had come under pressure last year after the collapse of the financial giant Lehman Brothers.

Public sector banks' executives said that while large banks were planning to limit their exposure to mutual funds to 20 percent of total investments, smaller banks were restricting these investments to Rs. 1,000 crore.