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.