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RBI limits investment by banks in Liquid Mutual Funds

 

THE RESERVE Bank extended the 10 per cent ceiling of bank investment in liquid schemes of mutual funds to include short-term debt funds.

The bank investment in such debt schemes of mutual funds with weighted average maturity of portfolio of not more than one year, would be subjected to the cap, RBI said.

"With a view to ensure a smooth transition, banks which are already invested in these (liquid) schemes in excess of the 10 per cent limit, are allowed to comply with this requirement at the earliest but not later than six months from the date of the circular," it said.

The RBI in its `Monetary Policy Statement for 201112' had directing banks to cap their investments in the liquid schemes of mutual funds at 10 per cent of their networth.

This is an effort to in crease the purview of earlier circular. RBI is focusing on stability of banking and mutual fund industry.

The RBI said same money was circularly moving between banks and the debt-oriented mutual funds (DoMFs), which could potentially lead to systemic risk.

Banks normally put in their surplus funds in liquid schemes of mutual funds, which invest in debt securities having maturing within 90 days. Also short-term debt schemes of duration of less than a year gives banks higher returns within a short period. In turn, DoMFs invest heavily in certificates of deposit of banks.

"Such circular flow of funds between banks and DoMFs could lead to systemic risk in times of stress or liquidity crunch," the RBI had said.

 

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