RBI is worried these days about close relationship between Banks and Mutual Funds. For quite few years RBI has been observing Banks getting too cozy with the Mutual Funds and finally it has reacted just like any other parent, if they found their children having a girlfriend or a boyfriend. Please don’t turn your wildest imagination on.
RBI on Tuesday, 5th July, 2011, extended the 10 per cent ceiling of bank investment in liquid schemes of mutual funds to include short-term debt funds. It was already pointed out by RBI in its Monetary Policy of 2011-12 in paragraph 112, that the investment by Banks in Liquid scheme of mutual funds has grown manifold.
Banks normally put in their surplus funds in liquid schemes of mutual funds, which invest in debt securities having maturity within 90 days. Also short-term debt schemes of duration of less than a year give banks higher returns within a short period. In turn, Debt Oriented Mutual Funds (DoMFs) invest heavily in certificates of deposit (CDs) of banks.
Such circular flow of funds between banks and mutual funds could lead to systemic risk in times of stress/liquidity crunch. Thus, Bank could face a large liquidity risk. Hence it was felt by RBI to put a restriction on the maximum of Investment in DoMFs.
As per the circular No. DBOD.No.BP.BC. 23 /21.04.141/2011-12, dated 5th July, 2011, the maximum Investment by Banks in liquid schemes of DoMFs will be subject to a prudential cap of 10 per cent of their net worth as on March 31 of the previous year. However, with a view to ensuring a smooth transition, banks which are already having investments in DoMFs in excess of the 10 per cent limit, will be allowed to comply with this requirement in six months’ time.
