RBI grants $4.4 Billion to help banks to lend to Mutual Funds

New Delhi: Banks in India are expected to lend to mutual funds (MFs) to help to meet their liquidity needs and overcome redemption pressure at interest rates of 10 to 11 percent following by a Reserve Bank direction to lend to mutual funds against securities like certificates of deposit (CDs), reported The Economic Times.

Reserve Bank has also decided to provide liquidity support up to $4.4 billion ( 20, 000 crore) at nine percent to the banks who are themselves cash-starved, to lend to MFs, against the banks' holding of government bonds. RBI sated that this facility was available on Tuesday only, but the banks can keep the money for 15 days.

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Till now, the banks make use of only $77 million ( 3,500 crore) themselves from the new RBI facility. According to industry sources the total demand from MFs to meet redemption pressure is well over $77 million that the banks raised from the central bank.

A senior fund manager hoped that as banks have used only a small portion of the available limit of $4.4 billion, the RBI might decide to keep the window open for some more days. Industry sources believe that the banks themselves are not particularly keen on lending to MFs against their CDs.

Redemption pressure presents more on short-term debt funds like liquid and liquid-plus funds and RBI put forward measures to address this problem mainly. Such funds commonly used by companies to park surplus funds for short terms up to 15 days.

Companies park their funds for short term in these funds to earn an annualized return of around seven to nine percent. As against this, if they leave the funds in the current accounts, the return will be nil. The fact that these are used as short-term parking slots by companies means that such funds, even in the normal course, witness huge inflows and outflows of money every day.