Mumbai: The Reserve Bank of India (RBI) has tightened credit facility for mutual funds and has barred banks from offering payment guarantees to stock exchanges on behalf of foreign institutional investors.

Issuing the guidelines to banks after the close of trading hours today, the central bank said it is concerned about the increasing flow of bank funds into the stock markets. These excess flows are adding liquidity to an already volatile market, RBI noted.

"Entities such as FIIs are not permitted to avail of fund or non-fund based facilities such as irrevocable payment commitments (IPCs) from banks," the RBI said, adding that funds provided by banks to the equity-oriented MFs would be factored into individual banks' capital market exposure limit.

Mutual funds can borrow up to 20 per cent of the net asset value of the scheme from banks for six months for meeting short-term funds for repurchase of units or payment of interest or dividend to the unit holders.

The RBI has issued these guidelines after it came to the notice of the central bank that "banks have extended large loans to various MFs and have also issued IPCs to stock exchanges (BSE and NSE) on behalf of MFs and FIIs".

The RBI has given banks six months to comply with the guidelines on exposure of banks to capital markets through loans to MFs and issuance of IPCs.

The RBI also auctioned `7.99 per cent government stock, 2017` and `8.33 per cent government stock, 2036` worth Rs7,000 crore.

The notified amount for the 7.99 per cent 2017 stock was Rs5,000 crore under the market stabilisation scheme (MSS) while the amount for 8.33 per cent 2036 stock was Rs2,000 crore.