Three banks are considering to park their excess funds in short term debt instruments like commercial papers, T-bills and government securities with maturities of one-two years. This is being considered in order to address RBI's concerns over circular movement of liquidity from banks to liquid schemes of mutual funds (MF) and vice versa.

The apex bank is worried that if liquidity starts drying up due to credit pick up banks would redeem their MF investments. This will create pressure on MFs , which would then be forced to borrow heavily from collateralised borrowing and lending (CBLO) facility, thereby increasing the call money rates.

RBI wants the banks to lend directly to corporate and not via MFs. Bankers are of the opinion that RBI wants this because it is anxious about the implications of circular movement of liquidity.

Industry observers say that banks have invested amount over Rs. 1 lakh crore in liquid schemes of MFs and this amount could be diverted to short term debt instruments. Moderate credit demand in the economy in the current fiscal, so far, has compelled the banks to park their funds in government securities and MFs.

Credit pick-up in the financial year up to October 9 stood at Rs 1,14,766 crore less than half the off-take (Rs 2,47,775 crore) during the corresponding period the previous year. Hence, banks had no option but to collectively channelise their daily surplus totaling to over Rs 1 lakh crore to the low-yielding RBI's reverse repo window.

A slow credit pick up had resulted in banks parking their excess funds in MFs since banks can easily enter and exit from these schemes. They also benefit from tax rebate on dividends from these schemes.