This will force banks to focus more on raising funds through individual fixed deposit and mutual funds to turn to retail clients to build assets under management. Banks have been accused of sharing a cosy relationship with mutual funds to meet their money obligation. Capital markets regulator Securities and Exchange Board of India has repeatedly pushed mutual funds to build a business based on retail portfolios rather than institutional money.

"It would be ideal that they (banks) maintain their holding within the 10% mark or level," said a resource. The RBI is said to have also told bank officials to cut exposure to liquid schemes in a phased manner over the next five months rather than redeem the entire amount just before the new limit comes to effect.

An RBI official is said to have conveyed the central bank's thinking to top bank executives soon after it announced this investment restriction in its monetary policy review on May 3. Though the RBI did not specify the extent to which banks need to bring down their investments in liquid schemes, executives are interpreting the unofficial "limit" as 5-6% of lenders' networth, said a banker familiar with the matter, requesting anonymity.

An email query to RBI on this matter did not elicit a response.

The revised investment limit will be based on the banking industry's total networth on March 31, 2011.

The mutual fund industry estimates banks' total networth on this date between Rs 3 lakh crore and Rs 4 lakh crore.

At 10% of the networth, banks' money flow into liquid schemes will be capped at Rs 30,000-40,000 crore after October. Currently, banks' investments in liquid schemes is about Rs 90,000 crore, fund managers said.

If banks decide to cap the investments in liquid schemes at 5% of their networth, the mutual fund industry may end up getting only about Rs 15,000-20,000 crore. Total assets under management was Rs 7.85 lakh crore on April 30.

Source: [Economic Times]