MUMBAI: Indian mutual funds, which are reeling under the impact of a raft of measures including a ban on charging entry load imposed by the securities market regulator Sebi, now face the threat of an erosion in the assets they manage. On Tuesday, the banking regulator- the Reserve Bank of India (RBI) - dealt a body blow to the industry which manages assets of over Rs 7,00,000 crore by directing banks to cap their investments in the liquid schemes of mutual funds at 10% of the banks' net worth in six months.
The RBI directive will dampen the cosy relationship between banks and mutual funds, which has been a cause of concern for the central bank in recent months. Banks park their surplus money in liquid schemes, which invest in debt securities of duration less then a year, including banks' certificates of deposits, companies' commercial papers, treasury bills and the collateralised lending and borrowing obligation or CBLO market, for quick returns. These funds, in turn, lend to banks in the overnight CBLO market. Mutual funds are also among the major investors in banks' certificate of deposits.
The RBI directive will dampen the cosy relationship between banks and mutual funds, which has been a cause of concern for the central bank in recent months. Banks park their surplus money in liquid schemes, which invest in debt securities of duration less then a year, including banks' certificates of deposits, companies' commercial papers, treasury bills and the collateralised lending and borrowing obligation or CBLO market, for quick returns. These funds, in turn, lend to banks in the overnight CBLO market. Mutual funds are also among the major investors in banks' certificate of deposits.
