Posts Tagged ‘market repo’

RBI Raises Concern over Circular Investment Btw. MFs & Banks.

RBI Raises Concern over Circular Investment Btw. MFs & Banks

RBI Raises Concern over Circular Investment Btw. MFs & Banks

As per the latest data released from the Reserve Bank of India, nearly 90% of the funds, which are parked by the banks in mutual funds (MFs) come back into the banks.

The funds come in the form of overnight borrowings through various channels.

🙂

RBI said that the banks parked Rs 66,687 crore in MFs as of September 25, 2009 in debt and liquid schemes.

In turn, the MFs have lent Rs 29,504 crore under the collateralized lending and borrowing obligation (CBLO) platform and Rs 29,328 crore under market repo, respectively.

🙂

CBLO allows non-banks to lend to banks short-term surpluses.

The lending of MF through CBLO and market repo as a percentage of banks’ investment in mutual funds has surged to 88% in September from about 64% in July.

🙂

The objection of RBI came when MFs also subscribe to commercial paper issued by corporates, which is tantamount to lending to corporates by MFs, which is ostensibly from funds raised from banks.

RBI has objected against indirect lending by banks through intermediaries.

In this circular flow, MFs lend to corporates, which the banks themselves hesitate to lend, which exposes banks in a regulatory concern.

However, the more serious is its concern over the circular investment between MFs and banks.