What changed
RBI introduced a prudential cap of 10% of net worth on banks' investments in liquid/short term debt mutual fund schemes with weighted average maturity up to 1 year. Banks exceeding this limit must comply within six months from July 5, 2011.
What it means for you
Banks must now monitor and limit their exposure to these MF schemes to avoid liquidity risk from simultaneous redemptions. This reduces the circular flow of funds where banks invest in MFs that lend back to banks via CBLO/repo and invest in bank CDs, which could amplify stress.
What you must do
- Calculate total investment in liquid/short term debt MF schemes (WAM ≤1 year) as a percentage of net worth as of March 31, 2011.
- Ensure compliance with the 10% cap; if exceeded, reduce exposure within six months.
- Review and adjust investment policies to align with the new prudential limit.
- Monitor weighted average maturity of MF portfolios to ensure it stays within 1 year.
Who it affects
All scheduled commercial banks (excluding RRBs), Treasury and investment departments of banks, Mutual funds offering liquid/short term debt schemes
What is the basis for the 10% cap?
The cap is 10% of the bank's net worth as on March 31 of the previous financial year.
Which mutual fund schemes are covered?
Liquid/short term debt schemes (by any name) with weighted average maturity of the portfolio not exceeding 1 year.
What if my bank already exceeds the limit?
You have up to six months from July 5, 2011 to bring investments within the 10% cap.