The apex banking body Indian Banks' Association (IBA) will fix the lending rate in consultation with the mutual fund industry to help fund houses meet the redemption pressure, Finance Minister P Chidambaram said today.
"Chairman, IBA (T S Narayanaswamy) is in touch with the banks as well as the mutual fund industry to decide on an appropriate rate at which the banks will on-lend to the fund houses," Chidambaram told reporters here.
The mutual funds will be expected to submit the certificate of deposits (CDs) as collaterals to the banks.
"Government has been informed by the mutual fund industry that against their borrowings from the banks they will give as security mainly certificate of deposits of the bank themselves," Chidambaram said.
The RBI today decided to provide Rs 20,000 crore to the banks through 14-day repo auction at 9 per cent to help the mutual fund industry meet redemption pressure.
The decision follows a meeting between Sebi Chairman C B Bhave and RBI Deputy Governors, he said, adding that the central bank also heard key players in the mutual fund industry.
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"Government welcomes this announcement," Chidambaram said.
The decision was taken in view of the liquidity stress being faced by some of the mutual fund industry mainly on account of debt instruments and money market instruments.
Mutual fund industry had sought a facility for accessing funds and "consequently, the government requested Sebi and RBI to meet today and address the issue", the Finance minister said.