 "RBI flags MFs' borrowing play; bank lines are in excess of Rs 1 trillion")
The central bank’s periodic Financial Stability Report has highlighted issues with the way mutual funds use banks as a liquidity stop-gap and suggested that the practice requires greater supervision.
Mutual fund regulations allow schemes to borrow money to meet temporary liquidity needs. The data suggest that this provision is perhaps being used as an indirect form of insurance, says the Reserve Bank of India’s (RBI’s) Financial Stability Report. Essentially, the provision allows mutual funds to load up on high-yield papers (which are often illiquid), and bet on banks bailing them out if liquidity issues emerge later, noted the report.
Mutual fund regulations allow schemes to borrow money to meet temporary liquidity needs. The data suggest that this provision is perhaps being used as an indirect form of insurance, says the Reserve Bank of India’s (RBI’s) Financial Stability Report. Essentially, the provision allows mutual funds to load up on high-yield papers (which are often illiquid), and bet on banks bailing them out if liquidity issues emerge later, noted the report.
