Posts this month
A blog on financial markets and their regulation
The Reserve Bank of India’s Report on Trends and Progress in Banking in India 2009-10 contains an interesting discussion on the inter-linkages between banks and debt mutual funds (Box IV.1 on page 64). As of November 2009, banks had invested Rs 1.3 trillion in debt mutual funds, but had also borrowed Rs 2.8 trillion from these funds – banks were thus net borrowers to the extent of over Rs 1.5 trillion. It appears that debt mutual funds are intermediating two kinds of flows in the debt market.
The RBI report describes the intermediation of interbank lending as follows:
When banks were arranged in a descending order by the amount of their net borrowings from MFs, public sector banks figured prominently at the upper end as major borrowers, while the new private sector banks along with SBI could be seen as major lenders to MFs.
The interbank money market is one of the oldest and most liquid markets in India. The repo market for secured lending is also well established with a central counterparty for risk mitigation, and has worked smoothly even during the turbulent periods of 2008. Why would there be a need for mutual funds to intermediate this market? Two possible reasons come to mind.
It appears to me that the whole system of artificial tax breaks to mutual funds has created economically useless layers of intermediation
while also adding to systemic risk and fragility.