Despite RBI's advice for not investing largely in mutual funds, banks continue to park funds with the asset management companies. This is largely because the credit demand has not improved.
The latest RBI data reveals that banks' investment in mutual funds increased Rs 4,173 crore to Rs 1,64,656 crore during the fortnight ended November 20. Banks have been following a practice of parking huge sums at the beginning of quarter and withdrawing it at quarter's end.
D Subbarao, RBI's governor, in his quarterly monetary policy in October said that banks' investments in mutual funds were very high and they should limit exposures to mutual funds.
Banks have not only invested their surplus funds with mutual funds but also invested borrowed funds from collateralised borrowing and lending obligation (CBLO). Banks usually borrow funds at cheaper rates from CBLO and park them in mutual funds and RBI's reverse repo scheme at higher rates.
To discourage this arbitraging, RBI has imposed a CRR of 5 percent for CBLO borrowings which means that they have to set aside greater funds as cash to be parked with the apex bank.
Bankers say that they have adopted this practice due to poor credit offtake. The executive director of Bank of India, M Narendra said that following RBI guidelines, banks have reconsidered their strategies and altered their internal targets. Although, some banks huge temporary surpluses may have parked in liquid funds, he added.