Debt MFs to be kept off banks' investment limit

According to market sources, shortly a circular will be released by the RBI in order to clarify the issue as it was never the intention to include mutual funds under restricted category of unlisted bonds.

After the RBI issued the final circular on banks' investment in non-SLR bonds, great confusion was created among banks on investments in mutual funds which are neither listed nor rated.

Mutual funds are of the view that banks' investment in MFs are not same as long-term investment in bonds as these are short term in nature and mostly banks park their funds in money market and gilts funds.

Besides, MFs being open ended and with entry and exit option, should not be equated with bonds where funds are locked for a certain period of time, they said.

However, funds even with slightest exposure to equity will not be included under the exempted category and in any case investments by banks in those funds are governed by the RBIs' norms restricting their investments in equity to 5 per cent of the total demand and time liability, sources said.

Market players said these will give banks the opportunity to circumvent RBI restrictions on investment in unlisted bonds.

Recently, the RBI had prohibited banks from investing in unlisted and unrated bonds. However, with the limit of 20 per cent, 10 per cent could be invested in unlisted bonds and rest in mortgage-based securities and other sub investment grade papers.

This clause has, however, been made applicable for future bond issues and banks have been asked not to invest in fresh issues till they reach the ceiling of 20 per cent .

At present, almost 60 per cent of the total bond portfolio make up for unlisted bonds issued by state and central government undertakings.

The RBI had earlier asked for comments on its draft guidelines on banks' investment in non-SLR portfolio which had followed the guidelines issued by the Securities and Exchange Board of India, asking all bonds to be listed if they need to be traded on the exchanges.