Bank Loans and Mutual Funds

Bloomberg last Friday:

India's central bank today curbed bank loans to mutual funds by mandating that such amounts will be treated as the lenders' direct investments in stock and bond markets.

Banks are required to limit investments in capital markets to less than 40 percent of their net worth. Funds may borrow from banks only to meet ``temporary liquidity needs'' and as per the capital market regulator's guidelines, Mumbai-based Reserve Bank of India said in a notice on its Web site.

An inspection of the financial records of some banks showed they had extended ``large loans to various mutual funds and also issued irrevocable payment commitments to stock exchanges on behalf of mutual funds and foreign institutional investors,'' the central bank said. These transactions weren't included by the banks as part of their capital market investments.

The Securities and Exchange of India has ruled that a mutual fund may borrow only up to 20 percent of its net assets and for periods of not more than six months.

Banks must not give loans or other forms of financial assistance, such as payment guarantees, to foreign institutional investors, the Reserve Bank said.

The monetary authority has allowed domestic banks six months to comply with the instructions.