In order to prevent liquidity crisis, Reserve Bank of India (RBI) on Tuesday capped bank investments into liquid schemes to 10% of bank?s net worth as of March 31 of the previous fiscal year. Currently banks park anywhere between 20-30% of their net worth into the mutual fund liquid schemes.
However, RBI also said that, with a view to ensuring a smooth transition, banks which are already having investments in debt oriented mutual funds in excess of the 10% limit, will be allowed to comply with this requirement in six months? time. Market participants say that, currently banks have a net worth of over R5 lakh crore and they have parked around R1.1 lakh crore in liquid funds, which means that in the next six months liquid funds will see redemptions of over R60,000 crore.
Shyamala Gopinath, deputy governor, RBI says, ?The flows of banks into liquid schemes was concern that there could be systematic risk. The amount of banks investing in liquid schemes varied between 2% and sometimes even 50% (of its networth). By RBI estimates, 10% net worth would amount to R50,000, we have given the bank enough time and we believe there would be no disruption.?
Typically liquid schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money and government securities. These funds are appropriate for corporates and banks who park their surplus funds for short periods.
A Balasubramanian, CEO , Birla Sun Life Asset Management Company said, ?It will have some impact on the liquid schemes, but on the other hand fund houses will expand to other investor class such as retail and high networth individual (HNI). In our view, this will not disrupt the system as the transition period is close to 6 months, by that time, the system will adjust automatically.?
Some of the fund managers also feel that, that with the new move, liquid fund will not be attractive any more and banks will be instead look at other avenues like ultra-short term funds or liquid plus fund to park their excess money. .Dwijendra Srivastava, Head of Fixed Income at Sundaram Mutual Fund says, ?I think it will not have much impact as RBI have given enough time to banks to pull-out the money. However in the coming days we might witness some debt fund managers holding cash in order to meet the redemption pressure.?
