RBI caps banks' investments in VCFs

The Reserve Bank of India today capped investments by banks in venture capital funds (VCFs) at 10 per cent of their respective net worth.

The banking regulator has also asked banks to take its prior approval for making "strategic" investments in VCFs. It said strategic investments would mean a bank's investment exceeds 10 per cent of the equity/unit of a VCF.

Further, investments in VCFs have been clubbed under the umbrella limit which specifies that investment of banks in any financial services entity, financial institutions, stock and other exchanges should not exceed 20 per cent of its paid up capital and reserves.

The investments in shares/units/bonds of VCFs will be assigned a risk weightage of 150 per cent for measuring the credit risk during the first three years when they are maintained under the "held to maturity category" ( HTM).

Risk weightage is risk attached to the asset and if it is 100 per cent , then the bank has to provide capital to the extent of 9 per cent of the investment to support the asset. This is called capital adequacy for the bank.

HTM is the category in a bank's portfolio where the investment is usually held till it matures and it is not available for trading in the market.

Once the units are transferred to trading category (available for sale -AFS), a capital charge of 13.5 per cent has to be provided to reflect risk weight of 150 per cent.

Usually, 100 per cent risk weight requires a capital adequacy of 9 per cent. However, a bank's investment in unrated and unlisted bonds of VCFs is exempt from these guidelines.