Banks have been withdrawing from mutual funds after the regulator mandated a cap on their investments in liquid schemes in May 2011. Bank investments have dropped by 23 per cent in a month since the announcement.
According to the data provided by the Reserve Bank of India (RBI), bank investments in mutual funds were down from Rs 1,20,854 crore on May 6 to Rs 93,334 crore on June 3.
In its annual monetary and credit policy for 2011-12, RBI said banks were permitted to invest in mutual funds only to the extent of 10 per cent of their net worth. “Most banks had investments much above 10 per cent and, hence, would have withdrawn in order to comply with the new limits,” said a bond dealer with a domestic brokerage.
The regulator said that bank investments in mutual funds varied significantly depending on liquidity conditions that posed systemic risk. Banks also took advantage of arbitrage opportunity by borrowing at repo rate from RBI and then investing in high-yielding liquid schemes of mutual funds. “With the new mandate in place, banks will not be able to do so anymore,” said the dealer.
