RBI caps banks investment in liquid schemes

RBI caps banks investment in liquid schemes

Mumbai: The Reserve Bank of India (RBI) on Tuesday capped the investment of banks in liquid debt schemes at 10% of their net worth with a view to reduce the potential liquidity risk bank may face in the event of large scale redemptions.

With this, total investment by banks in liquid/short term debt schemes of mutual funds with weighted average maturity of portfolio of not more than one year will be subjected to a prudential cap of 10% of their net worth as on 31 March of the previous year, the RBI said.

This will result in huge outflows from debt oriented mutual fund schemes impacting the volume.

In its May annual monetary policy review, the RBI had said that the 10% cap would be imposed on banks’ trade; investments in debt schemes of mutual funds.

Banks, which already have investments in these schemes in excess of 10% have been given six months time to comply with the new norms, the apex bank said.

RBI said a circular flow of funds; where banks invest in liquid mutual fund schemes and borrow from collateralised borrowing and lending obligation

(CBLO) where mutual funds are investors.

“Such circular flow of funds between banks and mutual funds could lead to systemic risk in times of stress/liquidity crunch. Thus, banks could potentially face a large liquidity risk", the RBI said.