Banks get 6 months to comply with MF investment limits

Banks with investments in excess of 10 per cent of their net worth in liquid and short-term debt schemes will get six months to bring exposure in line with the ceiling. The Reserve Bank of India (RBI) has capped exposure to these schemes at 10 per cent of net worth.

RBI said the total investment in liquid or short-term debt schemes with weighted average maturity of portfolio of not more than one year would be capped at 10 per cent of net worth as on March 31 of the previous year. According to analysts, 10 per cent of the combined net worth of all banks would come to Rs 50,000-55,000 crore.

RBI, in its monetary policy for 2011-12, had flagged the risks arising from huge exposure to such short-term schemes. The regulator had indicated that bank investments in mutual funds would be capped at 10 per cent of net worth. Bank investments in mutual funds has come down by 30 per cent since May.

Banks’ investments in liquid schemes of mutual funds had grown manifold. The liquid schemes continue to rely heavily on institutional investors, such as commercial banks, whose redemption requirements are likely to be large and simultaneous. On the other hand, mutual funds are large lenders in the overnight markets, such as collateralised borrowing and lending obligation and market repo, where banks are large borrowers.

The various mutual fund schemes also invest heavily in certificates of deposit of banks. Such circular flow of funds between banks and mutual funds could lead to systemic risk in times of liquidity crunch. Banks could potentially face a large liquidity risk. It was, therefore, felt prudent to place certain limits on banks’ investments in liquid or short-term debt schemes of mutual funds, RBI said.

Source: Business Standard