Mumbai: Cash is the king in March. Commercial banks and mutual funds are rushing to collect as much cash as possible as they look to buff-up their year-end balance sheets and that has put those sitting on healthy cash reserves in the sweet spot.
Top private sector banks are offering up to 11.25% interest rates on bulk deposits. Fixed Maturity Plans of MFs are also offering returns as high as 10-11%. FMPs offer three-month, six-month and 12-month maturity schemes that are rolled over once they’re ready for redemption.
The main reason behind the mad rush by banks for deposits is, of course, the high credit growth and rising interest rates following the banking regulator’s policy of tightening liquidity. Even when there is no shortage of liquidity in the system, banks mobilize deposits in March to boost their balance sheets.
This year, competition between banks and MFs has intensified as the pool of money is shrinking. Corporate India’s expansion plans and growing ambition to acquire firms abroad has shrunk the investible pool for company treasury managers. The growth rate of India’s top 50 firms, in terms of cash and bank balances, has come down from 32% in March 2005 to 22% in March 2006. These 50 firms feature in the National Stock Exchange’s Nifty index. Collectively, these companies had a pool of Rs1.6 lakh crore of cash and bank balances in March 2006. The latest figures of their cash and bank balances are not available.
“ interest rates are hardening. On top of that, corporations are announcing ambitious capex plans and hence the pool of investible surplus funds is shrinking. In this scenario, firms will obviously park their money where they get the best returns with an easy redemption facility” says T.V. Raghunath, executive director Kotak Investment Bank.
Most cash-rich corporations have seen a sharp drop in their cash and bank balances over the last fiscal. Top private firms such as Reliance Industries, Tata Motors and VSNL have seen their cash-in-hand reduced by Rs250-1,000 crore.
Seshgiri Rao, director-finance, JSW Steel, says there has been a structural change in the way corporations invest their surplus cash. He says, expansion plans are now funded by cash accruals.
“Corporations are definitely preferring cash funds of mutual funds over bank deposits, not only to get tax arbitrage, but also the easy withdrawal options.” “Bulk deposits offer interest rates of 11%, are better for companies that have surpluses to invest for a longer term,” he adds.
And that explains why banks are offering higher rates to lure corporate customers.
“The net effect of giving such high deposit rates will not be felt on the balancesheets, since the size of the balance sheet itself has grown by 30-40%” says Ananda Bhoumik, senior director, Fitch Ratings.
The fixed-income maturity plans of MFs invest in short-term debt instruments such as certificate of deposits or overnight call money.
As the interest rates on these instruments have also gone up, FMPs are relativelymore successful in wooing more corporate clients.
More than 200 such FMPs manage more than Rs50,000 crore. People familiar with the situation say ITC has roughly Rs1,300 crore invested in FMPs, Sterlite Industries has Rs2,000 crore and smaller companies such as Raymond have around Rs500 crore.
Interestingly, the longer tenure FMPs of some of the bank-sponsored MFs are investing in the term deposits of their promoter banks. For instance, Prudential ICICI’s Hybrid FMP Series, which has Rs815 crore of assets, has invested 18.40% of the corpus in ICICI Bank’s term deposits
There are cash or liquid funds that also offer instant withdrawal facility and equally high returns. “Even after the increase in the dividend distribution tax as announced in the Budget, we haven’t seen corporations migrating to fixed deposits in a big way,” says Sameer Kamdar, country head-MFs, Mata Securities. Similar views are echoed by Surajit Mishra, senior vice-president, Bajaj Capital, who explains that the money to be paid by corporations towards advance tax is being invested in cash funds and the rest of it is being locked up in the FMPs.
Distributors and managers of such funds seem unperturbed by the shrinking pool of surpluses of the corporations.
“Many firms are raising money from the capital market and they are not deploying this money in their businesses immediately. They are parking the money in liquid funds in a big way,” Kamdar says.