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Cap On Bank Exposure In Liquid MFs Will Curb Volatility, Says Crisil

Mumbai, Jun 21 : The recent Reserve Bank directive to banks to cap their investments in liquid mutual fund schemes at 10 percent is positive for the asset management industry, as it can help fund

PTI [ Updated: June 21, 2011 21:13 IST ]
cap on bank exposure in liquid mfs will curb volatility
cap on bank exposure in liquid mfs will curb volatility says crisil

Mumbai, Jun 21 : The recent Reserve Bank directive to banks to cap their investments in liquid mutual fund schemes at 10 percent is positive for the asset management industry, as it can help fund mangers make better decisions, feels leading rating agency Crisil.


The directive would reduce volatility in the market as it will help fund managers make more prudent investment decisions since they are sure of the investible corpus, Crisil director, capital markets, Tarun Bhatia said here today.  “Crisil FundServices believes that this (RBI directive to banks to cap their investments in liquid MF schemes) will help reduce volatility in the debt fund flows,” Bhatia said.
 
Banks normally park their surplus funds in liquid MF schemes and redeem them when credit offtake is good or to meet their advance tax outflows.
In the May 3 annual monetary policy, RBI had said, “investment in liquid schemes of debt-oriented mutual funds (DoMFs) by banks will be subject to a prudential cap of 10 percent of their networth as on March 31 of the previous year”.

The directive was issued as RBI fears that the circular movement of the same fund between banks and MoMFs can potentially lead to systemic risks.
The RBI also said liquid schemes continue to rely heavily on institutional investors such as commercial banks for investment. In turn, DoMFs invest heavily in certificates of deposit of banks.

“Such circular flow of funds between banks and the DoMFs could lead to systemic risk in times of stress/liquidity crunch. Thus, banks could potentially face a large liquidity risk. It is, therefore, felt prudent to place certain limits on banks' investments in MFs,” RBI had said. 
As of May 2011, total assets under management (AUM) stood at Rs 7.31 lakh crore, out of which the liquid schemes stood at Rs 1.83 lakh crore, as per the Association of Mutual Funds in India data.

Crisil envisages a significant reduction in the AUMs with banks withdrawing the surplus amount from these schemes in a phased manner.
According to Bhatia, as per the new RBI guidelines, banks' exposure to the MF industry should come down to around Rs 30,000 crore from the current Rs 1.3 lakh crore, by this October. As of May, the banks' exposure in DoMFs stood Rs 1.3 lakh crore. PTI

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