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Loans/advances to MFs to be included in Banks’ Capital Market Exposure

Number of banks have extended large loans to various Mutual Funds and have also issued Irrevocable Payment Commitments (IPCs) to stock exchanges (BSE & NSE) on behalf of Mutual Funds/FIIs. These exposures have, however, not been included by the banks for computation of their Capital Market Exposure.

In view of above Reserve Bank of India in it's circular dated 14th December 2007 has asked banks to comply with the following guidelines within 6 months-

i. Loans extended by banks to Mutual Funds

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 within the ceiling of 20% of the net asset of the scheme and for a period not exceeding 6 months. Such finance, if extended to equity-oriented Mutual Funds, will form part of banks' capital market exposure.

According to SEBI (Mutual Funds) Regulations, 1996, a mutual fund shall not borrow except to meet temporary liquidity needs of the mutual funds for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit holders and, further, the mutual fund shall not borrow more than 20% of the net asset of the scheme and for a duration not exceeding six months.

(ii) Irrevocable Payment Commitments (IPCs) issued to various stock exchanges at the request of MFs for their secondary market purchases

Banks issue Irrevocable Payment Commitments (IPCs) in favour of stock exchanges on behalf of Mutual Funds to facilitate the transactions done by these clients. RBI has advised that IPCs are in the nature of non-fund based credit facility for purchase of shares and are to be treated at par with guarantees issued for the purpose of capital market operations. Such exposure of banks will, therefore, form part of their Capital Market Exposure. Banks are also advised that entities such as FIIs are not permitted to avail of fund or non-fund based facilities such as IPCs from banks

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