Cap on banks’ call lendings to be boon for liquid MF schemes

Liquid schemes of mutual funds are expected to see heavy inflows from commercial banks once RBI cap on banks’ lending in the call money...

Liquid schemes of mutual funds are expected to see heavy inflows from commercial banks once RBI cap on banks’ lending in the call money market becomes operational, mutual fund managers say. The RBI cap on banks’ borrowing and lending operations in the call market becomes effective from June 15.

RBI has put a cap of 25 per cent of the previous year’s net owned funds for banks’ lendings in the call money market, as part of its credit policy announced on April 29. Already, funds like SBI Mutual Fund have begun seeing a huge rise in inflows to their liquid schemes thanks to

investments by banks, following the announcement of the cap in the credit policy. Says Shravana Kumar at SBI Mutual: “We already have seen inflows rise from Rs 100 crore to Rs 200 crore after the credit policy was announced, and most of it is from banks.”

The reason for the banks to now begin channelising funds into liquid schemes of mutuals is simple. Faced with a cap on lending to call, the banks, which traditionally have been heavy lenders in this market will now be faced with a dilemma of where to park the funds. Says a debt fund manager of a predominantly foreign-owned mutual fund: “With the avenues for these banks in the call market drying up as a result of the RBI cap, it can safely be expected that they would channelise part of their surplus funds to the liquid mutual fund schemes along with the repos and term money market.” Fund managers also point out that the banks would naturally prefer to park their monies in such liquid schemes, since that would be the closest thing to putting money in call. The liquid schemes can be redeemed anytime, and are very similar to the call money market.

Story continues below this ad

For the past three years, as is common knowledge, there has been poor credit offtake by corporates from banks. RBI, incidentally, has been trying to develop the repo market for a very long time as the call money market is uncollateralised whereas the repo market is a secured one wherein one player lends to another and takes government securities as security.

If banks want to lend for a slightly longer duration than the call money market, the option is to either lend in the term money market or the liquid funds of mutual funds. RBI has also tried to develop the term money market for quite some time now. One bank can lend to another bank for a duration of one to three months under the term money market. In fact, liquid funds too invest in the call money and the repo market. This could mean that banks could even use them as intermediaries to lend in the call money and the repo market.