The Reserve Bank of India (RBI) has, for the second time in a fortnight, sought details from banks about their investments in mutual funds treasury officials at several banks said. The banking regulator has yet again made it clear in its communication that it is against banks handing over their surplus money to fund houses, officials told ET.
RBI’s concern stems from the fact that banks’ investments in mutual funds have risen even after it first made its displeasure known about these in the October mid-term policy review. This number rose by Rs 8,753 crore to Rs 1,69,236 crore in the month that ended on December 4, data from RBI show.
In the latest letter, the RBI has asked banks to give data on the average, lowest and the peak level exposure to mutual funds at various points of time. The regulator specifically sought data about their quarterly exposure since March 2009 and the third quarter (September to December) exposure to mutual funds, said treasury officials who requested they not be quoted.
The RBI also wants data on certificate of deposits (CD) issued by banks which are directly subscribed by mutual funds. CDs are money market instruments sold by banks to raise short-term funds. This money, too, is often routed back to mutual funds through investments in their liquid funds.
The regulator has also sought specific details about the money lent by mutual funds to banks through market repo or Collateralised Borrowing & Lending Obligations (CBLO) route. Both are markets where money is lent and borrowed on an overnight basis.
In mid-December, the RBI had officially asked banks about their aggregate exposure in mutual funds schemes and the steps that they have taken to curtail this figure although it was in the mid-term policy review in October 2009 that RBI governor D Subbarao had first expressed concern about banks parking surplus money in mutual funds.
In an interview to this newspaper, the governor had termed it as “circular trading”, saying the money was finding its way back to banks through route.
In a meeting with the RBI, bank CEOs had assured the regulator that they will set an internal limit, approved by the board, on such investments. It is estimated that banks account for one-third investments made in the liquid mutual fund scheme.
Meanwhile, select public sector banks have begun putting internal caps on such investments. Canara Bank has fixed a limit of Rs 6,000 crore or 10% of total investments while Oriental Bank of Commerce has fixed it at 10% of investments, top officials in the two banks said.
For Dena Bank and Indian Bank, the number stands at 5% of total investments. Officials with Bank of Baroda said they are considering linking the quantum of cap to total assets.
The RBI has often maintained that it is not comfortable with banks extending funds to corporates through intermediation of mutual funds. Banks charge anywhere between 7% to 10% to most highly-rated corporates on short-term loans while mutual funds subscribe to the short-term bonds at rates ranging from 5% to 7%.
As a result, corporates who are perceived as more creditworthy have begun raising money from mutual funds by selling debentures with a daily put and call option shunning banks in the process.
Source: http://economictimes.indiatimes.com/News/Economy/Finance/RBI-puts-banks-on-notice-again-over-MF-exposure/articleshow/5397769.cms?curpg=2
RBI’s concern stems from the fact that banks’ investments in mutual funds have risen even after it first made its displeasure known about these in the October mid-term policy review. This number rose by Rs 8,753 crore to Rs 1,69,236 crore in the month that ended on December 4, data from RBI show.
In the latest letter, the RBI has asked banks to give data on the average, lowest and the peak level exposure to mutual funds at various points of time. The regulator specifically sought data about their quarterly exposure since March 2009 and the third quarter (September to December) exposure to mutual funds, said treasury officials who requested they not be quoted.
The RBI also wants data on certificate of deposits (CD) issued by banks which are directly subscribed by mutual funds. CDs are money market instruments sold by banks to raise short-term funds. This money, too, is often routed back to mutual funds through investments in their liquid funds.
The regulator has also sought specific details about the money lent by mutual funds to banks through market repo or Collateralised Borrowing & Lending Obligations (CBLO) route. Both are markets where money is lent and borrowed on an overnight basis.
In mid-December, the RBI had officially asked banks about their aggregate exposure in mutual funds schemes and the steps that they have taken to curtail this figure although it was in the mid-term policy review in October 2009 that RBI governor D Subbarao had first expressed concern about banks parking surplus money in mutual funds.
In an interview to this newspaper, the governor had termed it as “circular trading”, saying the money was finding its way back to banks through route.
In a meeting with the RBI, bank CEOs had assured the regulator that they will set an internal limit, approved by the board, on such investments. It is estimated that banks account for one-third investments made in the liquid mutual fund scheme.
Meanwhile, select public sector banks have begun putting internal caps on such investments. Canara Bank has fixed a limit of Rs 6,000 crore or 10% of total investments while Oriental Bank of Commerce has fixed it at 10% of investments, top officials in the two banks said.
For Dena Bank and Indian Bank, the number stands at 5% of total investments. Officials with Bank of Baroda said they are considering linking the quantum of cap to total assets.
The RBI has often maintained that it is not comfortable with banks extending funds to corporates through intermediation of mutual funds. Banks charge anywhere between 7% to 10% to most highly-rated corporates on short-term loans while mutual funds subscribe to the short-term bonds at rates ranging from 5% to 7%.
As a result, corporates who are perceived as more creditworthy have begun raising money from mutual funds by selling debentures with a daily put and call option shunning banks in the process.
Source: http://economictimes.indiatimes.com/News/Economy/Finance/RBI-puts-banks-on-notice-again-over-MF-exposure/articleshow/5397769.cms?curpg=2
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