RBI Finally Tighten Banks’ Capital Market Exposure

RBIReserve Bank of India (RBI) has finally tightened banks’ capital market exposure by implementing new rules and regulations.

In a circular, RBI has told that entities such as FIIs are not permitted to avail of fund or non-fund based facilities such as irrevocable payment commitments (IPCs) from banks, under the provisions of the Foreign Exchange Management Act (FEMA). The banks have been asked to unwind all such guarantees given on behalf of FIIs within six months.

RBI further stated that the 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

The annual inspection of certain banks and an analysis of the consolidated prudential return (CPR) of some banks show that they 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, RBI said in a statement.

While sources said that the RBI directive is unlikely to have a major impact as only a few large FIIs were actually availing of bank guarantees.

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