RBI checks flow of bank funds to MFs, FIIs

Concerned over the increasing flow of banking funds into the stock markets, the Reserve Bank on Friday tightened the credit facility for Mutual Funds and asked banks not to guarantee payments to stock exchanges on behalf of Foreign Institutional Investors.

Issuing the guidelines after the close of trading session, the RBI said: "Entities such as FIIs are not permitted to avail of fund or non-fund based facilities such as Irrevocable Payment Commitments (IPCs) from banks."

The RBI further said that funds provided by banks to the equity-oriented MFs would be factored into individual banks' capital market exposure limit.

As far as other MFs are concerned, the central bank said they can borrow up to 20 per cent of the net asset of the scheme from banks for six months to meet temporary liquidity need like repurchase of units or payment of interest or dividend to the unit holders.

The RBI has issued these guidelines after it came to the notice of the central bank that "banks have extended large loans to various MFs and have also issued IPCs to stock exchanges (BSE and NSE) on behalf of MFs/FIIs".

The RBI has also given six months time to the banks to comply with its notification on exposure of banks to capital markets through loans to MFs and issuance of IPCs.