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Our Bureau

Mumbai, Dec 14

Bank loans to equity-oriented mutual funds will now form part of the bank’s total capital market exposure, said the Reserve Bank of India in a note issued today.

In its note the RBI said, “Banks are advised to be judicious in extending finance to mutual funds and grant loans and advances to mutual funds only to meet their temporary liquidity needs for the purpose of repurchase/redemption of units.”

However, this may not have a large impact on banks, said bank officials. A senior official from a public sector bank said, “A short term loan to a mutual fund is a standby facility in any case. In India we have not seen a stage, as yet, of large-scale redemptions, which would make mutual funds approach banks for loans.” The RBI also said that irrevocable payment commitments (IPCs) issued to stock exchanges at the request of mutual funds for their secondary market purchases would also form part of banks’ capital market exposure.

This facility, too, is not something that mutual funds normally use, the bank official said.

“Mainly the IPCs are used only by brokers, which in any case, is part of banks’ capital market exposure,” he explained.The RBI’s move may be a precautionary one, in the light of the sub-prime crisis, since in the US banks have given loans to hedge funds, he added.

As of now a bank’s aggregate capital market exposure is restricted to 40 per cent of its net worth on a solo and consolidated basis and direct exposure is limited to 20 per cent of its consolidated net worth.

More Stories on : RBI & Other Central Banks | Mutual Funds | Credit Market

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