Banks get time till December to reduce investment in debt mutual funds

By | June 16, 2011

A recent press report said that the Reserve Bank of India has allowed banks time till end of December to reduce their investment in liquid or short-term debt mutual funds, where it is exceeding the limit of 10 per cent of the net worth.

A notification from the RBI said that banks which have investments in liquid or short-term schemes of mutual funds in excess of the 10 per cent limit are allowed to comply with this requirement at the earliest but not later than six months from the date of this circular.

Explaining its concern over such investments, the RBI said that the liquid schemes continue to rely heavily on institutional investors such as commercial banks. The various schemes of mutual funds also invest heavily in certificates of deposit of banks. 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.

In the annual monetary policy announced in April, the central bank had given banks a period of six-months to reduce their investment. This has now been extended by three more months.

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About Pradeep Yuvaraj

Pradeep Yuvaraj is a Co-Founder and Director at Finerva Financial Solutions Private Limited, a financial education company focused on personal finance education. He has penned over 250 articles relating to Personal Finance and clocked over 500 hours of educating individuals on managing personal finance. He is a serial entrepreneur and has been associated with 7 Start-ups. His entrepreneurial experience spans industries as varied as Education, Gas Engineering, Automobile Design, Software development and more recently a Pure play presentation design company. Prior to turning entrepreneur in 2005, he has worked for 3 of the top ten companies of the world - Shell, ExxonMobil and Total SA. This experience included handling Branch Operations, Channel Sales and Business Development across 5 states over a period of 8 years. He holds an MBA from Symbiosis and an Electronics Engineering Degree from the University of Pune.

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