RBI cautions on banks, funds cross-investments

RBI cautions on banks, funds cross-investments

Mumbai: Investments by banks in mutual funds that have in turn heavily bought short-term debt issued by banks, has led to significant risk exposure that needs to be addressed, a top Reserve Bank of India (RBI) official said on Tuesday.

Banks have invested a significant amount of money in mutual funds, which in turn park the money in certificates of deposits (CDs), Usha Thorat, deputy governor of the Reserve Bank of India said.

CDs are debt instruments issued by banks that have a maturity of up to one year.

“Banks have a significant part of their liability in the form of CDs and have to be sensitive to rollover risks," Thorat told a banking conference

Banks that have significant investments in mutual funds that have invested in CDs must be sensitive to “the liquidity risk in the event of sudden redemption by large investors simultaneously," she added.

In calendar 2009, Indian banks raised Rs2.06 trillion via CDs instruments partly to meet asset-liability mismatches arising due to deposits parked with the bank when interest rates were high.

“This distortion, where mutual funds are apparently acting as intermediaries in what otherwise should have been intermediated by the inter-bank market is something that needs to be addressed," said Thorat.