RBI cautions on banks' involvement in MFs

The Reserve Bank of India (RBI) has sounded caution on banks’ growing involvement in mutual funds as there are issues concerning systemic stability.

“Banks have emerged as conduits for mutual funds (MFs) diverting a large portion of their deposits towards investments in such funds, as well as borrowing from these funds. However, there are issues concerning systemic stability related to the growing involvement of banks in mutual funds,” the central bank said in the Trends and Progress report today.

According to an analysis conducted by the central bank to study the interlinkages between banks and debt-oriented mutual funds (DoMF), it was found there was a significant growth in banks’ investments in DoMFs from December 2008 to December 2009 — the period of analysis.

“Growth in investments in DoMFs was higher than the growth observed in the total investments of scheduled commercial banks (SCBs) as well as their total non-SLR investments during this period. Second, banks were net borrowers since December 2008 and not net lenders to MFs,” the study noted.

The net borrowing by SCBs from MFs for November 2009 was Rs 1,56,317 crore. It was also found that all the banks investing in DoMFs were domestic and did not include any foreign bank.

The analysis shows public sector banks were major borrowers from mutual funds, while new private sector banks, along with SBI, could be seen as major lenders to MFs.