MFs using banks to divert monies, finds RBI

MFs using banks to divert monies, finds RBI

In a ‘Report on the Trends & Progress of Banking Sector in 2009-10’ it said: Banks have emerged as conduits for mutual funds (MFs) diverting a large portion of their deposits towards investments in such funds, as well as borrowing from these funds. However, there are issues concerning systemic stability related to the growing involvement of banks in mutual funds.”

As per an analysis conducted by RBI to study the interlinkages between banks and debt-oriented mutual funds (DoMF), it was found there was a significant growth in banks’ investments in DoMFs from December 2008 to December 2009 — the period of analysis. “Growth in investments in DoMFs was higher than growth observed in the total investments of scheduled commercial banks (SCBs) as well as their total non-SLR investments during this period. Second, banks were net borrowers since December 2008 and not net lenders to MFs,” it noted.

The net borrowing by scheduled commercial banks (SCBs) from MFs for November 2009 was Rs 1,56,317 crore. It was also found that all banks investing in DoMFs were domestic and did not include any foreign bank.

Dip in profits

The analysis shows public sector banks were major borrowers from mutual funds, while new private sector banks, along with the State Bank of India, could be seen as major lenders to MFs.

Another concern was decline in the growth of profits of SCBs. At the aggregate level, growth in net profits, which was on a steady rise during the four years up to 2007-08, posted a decline in 2008-09, which was repeated in 2009-10.

Return on Assets (RoA) of SCBs declined from 1.13 per cent in 2008-09 to 1.05 per cent in 2009-10. Further, there was a decline in all other indicators too at the aggregate level, such as Return on Equity, net interest margin and spread (defined as the difference between return on and cost of funds) in fiscal 2010. The other emerging concern was with respect to asset quality of banks as the gross Non-Performing Assets (NPAs) ratio showed an increase from 2.25 per cent in 2008-09 to 2.39 per cent in 2009-10.

Moreover, there was an increase in the proportion of doubtful and loss assets in 2009-10. The increase in gross NPA ratio coupled with a decline in the (outstanding) provisions to gross NPA ratio in 2009-10 at the aggregate level, underlined the need for further strengthening of provisions by banks.

However, even against the backdrop of an increase in NPA ratio, there was a rise in the Capital to Risk Weighted Assets Ratio (CRAR) of SCBs, which stood at 14.5 per cent at end-March 2010, far above the stipulated minimum ratio of 9 per cent under the Basel II framework indicating the robust capital adequacy of banks in India.

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