Banks are game to lend to mutual funds, but not by hurting their own bottomlines. That’s the message they sent out to the RBI by bidding for barely Rs 2000 crore from the special RBI window created to provide a lifeline to mutual funds. This, when debt mutual funds had seen outflows of over Rs 22,000 crore over the last three days.

The RBI had no choice but to relent; after all banks are the ones with the moolah at this point. So the central bank today allowed banks to claim the various benefits for lending to mutual funds, even if banks used their own funds and not from RBI’s special window at 4.4 percent.

Today no bank will borrow from RBI (or from anyone) at 4.4 percent, when they are dumping 7.5 lakh crore of excess cash at 3.75 percent with RBI every day.

So, the rule that banks would be exempted from mark-to-market and be given priority sector set offs if they borrowed at 4.4 percent from RBI, was a non-starter.

Banks want to lend to mutual funds because RBI’s sops are attractive. Consider these: large exposure rules won’t apply( so you can buy any amount of Tata Steel or HDFC bonds), the amount lent to mutual funds will be deducted from total credit while calculating priority sector obligations. Even better, this exposure won’t be counted in the banks’ capital market exposure and above all they won’t have to be marked to market.

Banks are salivating at the prospect. But the fly in the ointment was the clause requiring them to borrow from RBI’s special window. Borrow from RBI at 4.4 percent! Why? When the overnight rate in the TREP( tripartite repo ) market is 2-3 percent.

But funds are desperate and the regulator has few choices. And so bankers are having their cake and getting to eat it too.

The SBIs, the HDFC Banks, the Kotaks, and the ICICIs are all buying PSU bank perpetual bonds, NABARD bonds, PSU debentures at mouth watering yields of 8-11 percent. Rest assured, many banks will show a fall in the risk weighted assets this quarter, having loaded up on high quality paper bought cheaply from hapless funds.

But for bankers it is not just about getting good quality assets cheap. It is also the pleasure of getting back at mutual funds. Since demonetisation, there has been a steady flow of savings from bank fixed deposits to mutual funds. Fund managers got to buy bonds of marquee companies and dump them at will, while banks were stuck with illiquid loans, often of stagnating projects. In the past four years, fund managers were the stars of the financial services industry and bankers were hounded for their non-performing assets. The boot is now on the other foot. And looks like it will stay that way for a while.

First Published:Apr 30, 2020 3:36 PM IST