The Reserve Bank of India has warned the banks to put a conservative limit on their investment in zero coupon bonds which also include the non bank finance companies (NBFCs).

RBI has advised the banks to invest in zero coupon bonds only if the issuer builds up a sinking fund and invests in liquid investments or securities such as government bonds.

The investments in zero coupon bonds on a large scale could be a risk to the banks and it could harm the economy and banking operations of the country.

RBI said on its website that the risk factor could be significantly higher especially for long term zero coupon bonds. This investment plan has not been used frequently by the companies as it holds a big risk over the interest rates fluctuations.

The RBI did not unveiled any details about the highest amount of money the banks may invest in the zero coupon bonds.

At the same time the pace of growth in the bank deposits and credit fell down in the last quarter of the fiscal year 2009-10 compared to the previous quarters.