Bank loans to equity MFs to be part of capital market exposure

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 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.” 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.