RBI mulling cap on bank investment in MFs: Aditya Puri

To avert an adverse fallout of the banks’ growing links with the mutual fund industry, the Reserve Bank of India (RBI) may soon consider capping such investments, especially in debt schemes.

In a recent interaction with banks, RBI had conveyed it could consider uniform guidelines for bank investments in debt schemes of mutual funds, HDFC Bank Managing Director Aditya Puri told reporters on the sidelines of the curtain raiser of BANCON 2010 here today.

At present, RBI does not prescribe any limit on how much a bank could invest in mutual funds. The regulator has left it to the banks. It had asked them to frame board-approved internal norms on how much the cap should be.

Banks have various yard sticks, like a percentage of their net worth or non-SLR (statutory liquidity ratio) portfolio. Most banks have capped exposure — both, total and group.

In October 2008, RBI had raised concerns regarding banks’ investments into mutual fund schemes, wherein it had stated that funds had flowed to companies through mutual fund investments.

At a time when liquidity in the system remains tight, the central bank is mulling a ceiling on how much banks could investment in mutual funds.

RBI has sought information on the practices adopted by banks in this regard. “The concern of the central bank arises from the liquidity risk perspective. When liquidity is tight and the fund house is unable to pay back, it would create systemic problem,” said a banker.

In its Trend and Progress on Banking report 2009-10 too, RBI had noted the increasing flow of credit to companies through mutual funds.