October 30, 2009

Indian mutual fund (MF) houses, which manage short-term investments of banks averaging over Rs 1,00,000 crore, are set set to take a hit with leading banks firming up plans to impose internal limits on such investments.The plan to fix limits on investments by banks in fixed-income funds comes just a day after RBI governor D Subbarao indicated to bank chiefs that lenders should improve governance norms relating to investments in MFs.

What he meant was that banks’ investments in mutual funds were flowing back to banks as borrowings from overnight markets. In the overnight markets such as the collateralised borrowing lending obligations (CBLO) and repo market, where financial entities borrow and lend funds on overnight basis, mutual funds have been major lenders. Mr Subbarao termed it as “circularity in movement of liquidity”.