RBI/2011-12/106
DBOD.No.BP.BC. 23/21.04.141/2011-12
July 5, 2011
The Chairmen & Managing Directors/
Chief Executive Officers of
All Scheduled Commercial Banks
(excluding Regional Rural Banks)
Dear Sir,
Investment by banks in liquid/short term debt schemes of mutual funds
Please refer to paragraph 112 of the Monetary Policy Statement 2011-12 (extract
enclosed) wherein it has been indicated that banks’ investments in liquid
schemes of mutual funds have 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, they
are large lenders in the over-night markets such as collateralised borrowing and
lending obligation (CBLO) and market repo, where banks are large borrowers. The
various schemes of mutual funds also 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, banks could
potentially face a large liquidity risk. It is, therefore, felt prudent to place
certain limits on banks’ investments in liquid/short term debt schemes of mutual
funds.
- Accordingly, it has been decided that the total investment by banks in
liquid/short term debt schemes (by whatever name called) of mutual funds with
weighted average maturity of portfolio of not more than 1 year, will be subject
to a prudential cap of 10 per cent of their net worth as on March 31 of the
previous year. 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 ensuring a smooth transition, banks which are already having
investments in these schemes of mutual funds 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 this circular.
Yours faithfully,
(A.K. Khound)
Chief General Manager
Encl: As above
Investments in Debt Oriented Mutual Funds
- It has been observed that banks’ investments in liquid schemes of debt
oriented mutual funds (DoMFs) have 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. DoMFs, on the
other hand, are large lenders in the over-night markets such as collateralised
borrowing and lending obligation (CBLO) and market repo, where banks are large
borrowers. DoMFs invest heavily in certificates of deposit (CDs) of banks. Such
circular flow of funds between banks and DoMFs could lead to systemic risk in
times of stress/liquidity crunch. Thus, banks could potentially face a large
liquidity risk. It is, therefore, felt prudent to place certain limits on banks’
investments in DoMFs. Accordingly, it is proposed:
- that the investment in liquid schemes of DoMFs by banks 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.