The Reserve Bank of India (RBI) on Monday opened a special liquidity window of Rs 50,000 crore for mutual funds (MFs) to lend to the industry in the light of increased redemption pressure following the closure of six schemes by Franklinton. mutual fund.
“However, tensions are limited to the high-risk debt MF segment and at this stage, the large industry remained liquid,” RBI said on Monday.
The RBI window, effective from April 27, allows MFs to access liquidity through two routes. Banks can borrow funds from the statutory liquidity facility for them from the RBI and lend to MFs against their collateralized debt securities, or buy commercial paper or corporate debentures from MFs. After an outflow of 1.9 trillion from loan schemes in March 2020, credit-oriented categories have continued to move into April.
As per available data, the Credit Risk Fund category saw its assets under management (AUM) fall by 12 per cent to Rs 48,392 crore in April, followed by a 9 per cent decline in AUM in the medium-term fund. 25,502 crore Rs.
Industry officials said the RBI credit line is a much-needed support, noting that the redemption pressure was easing after Franklin Templeton winded down six of its credit-oriented schemes with a combined net worth of Rs 25,000 crore. Was expected
“This is a good confidence-building measure to maintain investor confidence in the MF industry,” said Nilesh Shah, managing director of Kotak MF, and president of the Association of Mutual Funds in India.
The move was also seen as positive by the corporate debt markets, as corporate bond yields fell 10–15 basis points (bps) after the announcement. Given the liquidity concerns following Franklin’s move, “market participants were trying to reduce their exposure to corporate bonds.” However, there has been some easing on that front, ”said a senior bond trader with a private bank.
Experts say that the impact of this move will depend on how the bank and MF come in on the valuation of bond exposure. “This liquidity window through banks may not be effective to solve the current problem. Banks are extremely at risk of taking any kind of credit risk in their books, said Arvind Chari, head-fixed income and options, Quantum Advisors.
“Portfolios that may require liquidity lines with certain issues. We have to see how banks are offering liquidity lines for such schemes, ”said Vidya Bala, co-founder of Primeinvestor.in.
Observers are concerned given the lack of interest shown by banks in targeted loan term repo operations. Sources say banks may avoid buying securities from MFs, and be cautious on their lending.
“Fund houses do not want to charge even a nominal price or sell their portfolio at par value. They want to book profits here, too, why should banks be interested? “Said a banker at a PSU bank.
Banks are also closely watching the investment pattern of MFs.
“Corporate bond investment is risky in this environment. About 30 per cent of funds with MFs are deployed in corporate bonds, 27 per cent in cash, equity and gold bonds. About 17 percent is invested in commercial papers. The total investment fund in AA, A, BBB papers is 1.2 trillion, ”said a treasury official in a private bank.
According to a person familiar with RBI’s thinking, banks receiving liquidity under this window will be asked to provide proof of purchasing MF paper or portfolio. “If the RBI finds that banks are taking the liquidity line and not really helping the MF, they could be fined heavily,” the person said.