The Reserve Bank of India (RBI) tightened the credit facility for mutual funds (MFs) as well as, asked banks not to guarantee payments to stock exchanges on behalf of Foreign Institutional Investors (FIIs).
RBI issued guidelines which said `entities such as FIIs are not permitted to avail of fund or non-fund based facilities such as Irrevocable Payment Commitments (IPCs) from banks. `
It further stated that the funds provided by the banks to the equity-oriented MFs will be factored into the individual banks capital market exposure limit.
As far as other MFs are concerned, the central bank said that they can borrow up to 20% of the net asset of the scheme from banks for 6 months to meet temporary liquidity need like repurchase of units or payment of interest or dividend to the unit holders.
The Apex bank issued these guidelines after it came to the notice of the central bank that banks have extended larger loans to various MFs and have issued IPCs to stock exchanges (BSE and NSE) on behalf of MFs/FIIs`.
The RBI has also given six months time to the banks to comply with its notification on exposure of banks to capital markets through loans to MFs and issuance of IPCs.
While advising banks to remain judicious in extending finance to MFs, the RBI said that they should normally meet their repurchase/redemption commitments from their own resources and resort to borrowing only to meet temporary liquidity needs.
Regarding IPCs, which are issued by banks to stock exchanges on behalf of their clients, the central bank clarified that IPCs are in the nature of non-fund based credit facility for purchase of shares and should be treated on par with guarantees issued by banks for capital market operations.
The IPC facility provided by banks to MFs would be factored into their respective capital market exposure limits, the RBI said, adding, the facility cannot be extended to FIIs.
RBI`s notification will not have positive implications for the mutual fund industry, Taurus Mutual Funds managing director R K Gupta said, adding that `they will have to maintain more liquid funds to meet redemption pressures.`
The central bank's restrictions for grant of loans and advances to mutual funds will mainly impact the bank-sponsored funds who rely more on funding from parent banks.
RBI had earlier issued norms for grant of loans by banks to individuals against units of Mutual Funds, but there were no explicit guidelines for grant of loans and advances to MFs by banks.
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