Mutual funds want lower special loan rate

NEW DELHI (Reuters) - Mutual funds want banks to lower the interest rate on loans given through a special window opened by the Reserve Bank, to tide over the liquidity crisis, officials said on Tuesday.

Banks have so far lend 150 billion rupees to mutual funds so far under the special facility for up to 600 billion rupees started by the Reserve Bank of India, but fund houses wanted loans on more easier terms.

On Tuesday, Finance Minister Palaniappan Chidambaram called a meeting of heads of big state-run banks, Indian Banks' Association (IBA) and Association of Mutual Funds of India (AMFI) to discuss the liquidity situation with fund houses.

"We want that commercial deposits of all banks and commercial papers to be accepted by the banks, and interest rate to be reasonable," AMFI chairman A.P. Kurian said after the meeting.

"We feel the lending rates are slightly higher. So we thought of flagging the issue," he said.

"He (finance minister) directed both of us (IBA and AMFI) to resolve the problems."

State Bank of India chairman O.P. Bhatt said his bank was keen to lend money to mutual funds between 11 and 12 percent under the special facility.

"It (the meeting) is to ensure the flow of liquidity from banks to mutual funds is made easy and they can meet redemption pressure when it happens," said M.V. Nair, chairman of Union Bank of India, who also attended the meeting.

The RBI last month offered the special facility after mutual funds were facing redemption issues as the global financial crisis froze the country's money markets.

Kurian said the liquidity situation with fund houses was "manageable" now and they could borrow money from banks whenever there is redemption pressure.

IBA and AMFI has set up a panel which would meet occasionally to iron out difference and resolve the problems, he added.