In a bid to tighten capital market exposure on banks, the Reserve bank of India (RBI) said on Friday that lenders should not guarantee payments to stock exchanges on behalf of foreign institutional investors (FIIs).
“Banks are also advised 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,” the central bank said in a notification.
Banks, on behalf of mutual funds (MFs), guarantee timely payments to the stock exchange for purchase of stocks. Such guarantees are called IPCs.
Henceforth, banks are advised to issue IPCs in the nature of non-fund based credit facility for purchase of shares and treat those on par with guarantees issued for capital market operations.
“The RBI is just streamlining norms for banks’ capital market exposure. Non-fund based credit facility is just like guarantee,” said A. Balasubramanian, chief investment officer of Birla Sun Life mutual fund.
In case of non-fund based credit, the guarantor would have to make payments only when the party on behalf of which it is issued. The RBI also said that any advances to equity-oriented mutual funds would be considered as capital market exposure. The banking regulator issued these guidelines after noting that "banks have extended large loans to various MFs and have also issued IPCs to stock exchanges (BSE and NSE) on behalf of MFs and FIIs".
The central bank has given six months time to the banks to comply with its notification on exposure of banks to capital markets through loans to MFs and though the issue of IPCs.