Anything that is beyond a limit is dangerous. It is an old saying. It applies to even banks investing in various options!
The ‘big monitor’ of funds employed and invested by banks has advised the banks to ‘to put internal limits on their exposure to mutual funds’.
Why such a measure?
Obviously, the funds are blocked in investments, rather fluctuating investment and are not available for the main purpose banks function – to lend.
Once upon a time, the banks solely depended on deploying the funds in loans, major industrial and infrastructure projects, etc. They were investments, at the same time, were considered helping the development of the nation. A project finance cell in a bank dealt with the National Highways, Toll bridges, railway line conversion projects and other major industrial projects. The long term lending in such projects helped the banks in deploying the funds in a more constructive way.
Now, with the focus on returns and the promises to the investors of higher returns have made the banks to turn towards the stock market linked options. This curtails the commercial and infrastructural lendings.
From the pages of Financial Express:
The move from the RBI came after a consistent increase was seen in mutual funds holdings of commercial banks over the past few months. As credit off-take weakened due to the impact of the last year’s economic crisis, banks parked funds in mutual funds.
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