RBI caps banks’ investment in mutual funds
06 Jul 2011
The Reserve Bank of India (RBI) yesterday notified banks that the total investment in liquid or short-term debt schemes of mutual funds, with weighted average maturity of portfolios of not more than one year, would be subject to a cap of 10 per cent of their net worth as on 31 March of the previous year.
The RBI observed that the weighted average maturity would be calculated as average of the remaining period of maturity of securities weighted by the sums invested.
With a view to ensure a smooth transition, banks with investments in these schemes of mutual funds exceeding the 10-per cent limit, should comply with this requirement within six months from 5 July 2011.
Accordingly by December, banks would have to pull out nearly Rs1 lakh crore from mutual funds debt schemes. Earlier, the RBI had set a deadline in October.
In its monetary policy, the apex bank had pointed out that banks' investments in liquid schemes of mutual funds had grown several times. The bank said the liquid schemes continued to be dependent on institutional investors such as commercial banks whose redemption requirements are likely to be large.
On the other hand, they have lent heavily in the over-night markets such as collateralised borrowing and lending obligation (CBLO) and market repo, in which banks are large borrowers.
The RBI said the various schemes of mutual funds also invested heavily in certificates of deposit (CDs) of banks.
