The Reserve Bank of India (RBI) advisory to banks for limiting their mutual fund (MF) exposure has prodded the lenders to put in place a detailed investment norm. While large banks were capping their MF exposure at 20 per cent of total investment, smaller banks were limiting such investments to Rs 1,000 crore, executives at public sector banks said.
Some of the public sector banks had norms in place even before RBI sounded a note of caution at the post-monetary policy meeting with bankers in October. But most of them did not have detailed guidelines, something that they are putting in place only now.
For instance, most banks are now limiting their exposure to a single fund house. Similarly, investment in one scheme is also proposed to be curtailed. Some banks are also planning to link exposure to a fund house to the level of assets under management.
With low demand for funds, banks have significantly stepped up investment in MF instruments. From a level of Rs 14,700 crore towards the end of October, bank investment in mutual fund schemes shot up to Rs 1,54,000 crore on October 23, 2009.
This prompted RBI to sound a note of caution when the second quarter review of the monetary policy was announced. A part of the worry emanated from the experience last year, when mutual funds had come under strain when the global financial crisis intensified after the collapse of Lehman Brothers in September 2008.
The regulator is trying to get banks to put in place norms and does not appear keen to issue guidelines to restrict this exposure.
In a post-policy interview, RBI Governor D Subbarao had told Business Standard: “There is nothing wrong with that, because we are giving them 3.25 per cent in the reverse repo window and they get more from mutual funds, which is tax-free, too. However, there is also a concern that through the mutual funds, there is circularity of money.”
In addition, he had said, “There is a second concern that there could be a regulatory arbitrage in the sense that mutual funds are lending to companies, which banks could not directly lend to.”
According to some bankers, RBI officials have informally asked banks to have a limit on mutual fund exposure during their interaction during the second quarter review of the monetary policy.
“We are not lending more than 20 per cent of our total investment to the mutual fund sector. In addition, there is a cap on single-company exposure, depending on the asset under management,” a senior executive of a bank said.
According to an executive of a large Mumbai-based bank, the bank takes an exposure of Rs 200-300 crore if the asset under management is Rs 10,000 crore.
In addition, banks are making it clear to the fund that they will put their money for a maximum 15 days, sources said.