Mumbai, Oct. 12: Banks are scooping their money out of mutual funds.

As the global financial turmoil exacerbates, stock markets flounder and their cash crunch intensifies, banks have started to press the redemption button on their mutual fund investments.

The scheduled commercial banks’ overall exposure in mutual funds have dropped to Rs 10,759 crore for the fortnight ended September 26 from a high of Rs 78,717 crore in early August last year — when the credit crisis first erupted in the US. That is a fall of 86.3 per cent in roughly 14 months.

Retail investors — who have helplessly watched the sensex collapse by 45 per cent since January — have seen equity mutual fund returns plummet this year. But they haven’t been able to cut their losses and run, hoping and praying that the crisis will blow over sometime soon.

Industry circles confirmed that several mutual funds were facing redemption pressure, particularly from companies and banks.

“It is nothing but mindless panic,” said Dhirendra Kumar, CEO of Value Research online, which tracks the mutual fund industry. “The pressure for redemptions is only accelerating. Moreover, there are only sellers and no buyers.”

Kumar indicated that fixed income mutual funds were one of the worst sufferers and here, investor confidence in liquid and liquid-plus funds had eroded significantly. He, however, added that unlike companies, retail investors had not pulled their money out.

Retail investors, Kumar said, have been largely investing in equity funds. Though they have not panicked, equity-linked funds have been the worst hit by the stock market crash.

Even as returns of some funds have plummeted by over 30 per cent over the past few months, the corpus of the mutual funds has also shrunk.

Bankers said the severe cash shortage they had been facing had forced them to pull out their money from the mutual funds.

Last Friday, banks were forced to pay as much as 23 per cent for overnight loans on the call money market. “They have been pulling their surplus money parked in the liquid funds,” a source said.

The figures put out by the RBI in its weekly bulletins indicate that the trend has gathered pace since June.

A senior official with a private sector bank said companies had been pulling their money out of mutual funds and parking them with banks in the form of short-term deposits.

“There is a renewed interest in bank deposits. The high interest rates offered by banks are luring investors,” he added.

Sources in the mutual fund industry said the withdrawals had taken place though they have been trying hard to assuage fears of investors. “We have said that the quality (of the portfolio) is not at all a problem. Yet, some categories of investors have panicked.”