What changed
Previously, banks and financial institutions were prohibited from granting loans against CDs and from buying back their own CDs before maturity. This circular temporarily lifts those restrictions for 15 days, but only for CDs held by mutual funds.
What it means for you
Banks can now provide liquidity to mutual funds by lending against their CD holdings or by repurchasing their own CDs from them, within a 15-day window. Loans to equity-oriented mutual funds will count toward banks' capital market exposure limits, and banks must comply with SEBI Mutual Funds Regulations.
What you must do
- Identify mutual fund clients holding your bank's CDs and assess their liquidity needs within the 15-day window.
- Ensure any loan against CDs or buy-back complies with SEBI (Mutual Funds) Regulations, 1996, paragraph 44(2).
- Classify loans to equity-oriented mutual funds as part of capital market exposure for regulatory reporting.
- Monitor the 15-day validity period ending October 29, 2008, and revert to normal restrictions after that.
Who it affects
All scheduled commercial banks (excluding RRBs and LABs), All-India Term Lending and Refinancing Institutions, Mutual funds holding Certificates of Deposit
How long is this relaxation valid?
The relaxation is valid for 15 days from the date of the circular, i.e., from October 14, 2008 to October 29, 2008.
Does this apply to all CDs or only those held by mutual funds?
It applies only to CDs held by mutual funds. The restrictions remain for other holders.
Will loans to mutual funds against CDs affect capital market exposure?
Yes, if the mutual fund is equity-oriented, such loans will be counted as part of the bank's capital market exposure.