The liquid schemes rely heavily on institutional investors such as commercial banks whose redemption requirements are likely to be large and simultaneous. DoMFs, on the other hand, are large lenders in the over-night markets such as collateralised borrowing and lending obligation (CBLO) and market repo, where banks are large borrowers. DoMFs also invest heavily in Certificates of Deposit (CDs) of banks.
Such circular flow of funds between banks and DoMFs could lead to systemic risk in times of stress/liquidity crunch. Thus, banks could potentially face a large liquidity risk. Restrictions on exposure to complex activities and products 28. Banks’ large involvement with complex products such as exotic derivatives and other risky activities like private equity, venture capital funds, etc. is disfavoured by RBI.