Mutual fund industry body Amfi has written to market regulator Sebi to consider raising the current borrowing limit for MFs from the existing 20% of assets under management (AUM) in individual schemes to 40%.
This follows the large-scale redemption pressure seen in liquid funds last week and fears of sudden outflows amid an increasingly tight liquidity environment. Sebi is yet to respond to Amfi’s request, said sources. The last time the 20% borrowing limit was raised to 40% was during the Lehman crisis of 2008. Back then, this limit was raised for six months only for meeting redemptions.
The borrowing limit allows fund houses to borrow from banks an amount that is directly proportional to their AUM in a particular category. This means if the liquid assets of a fund house is R100 crore, the fund house can borrow R20 crore to meet its redemption needs.
A fund official said that it is unlikely that any of the fund houses will need the additional borrowing limit but the move could provide a liquidity cushion and help assuage the concerns of investors. ?The borrowing limit could be made more flexible. Instead of having to approach the regulator each time there is a crisis, it is better that AMCs are given the discretion to up the borrowing limit in consultation with their Trustees,? he said, on condition of anonymity.
Meanwhile, a sharp rise in yields of 100-150 bps on one-month and three-month debt papers on Wednesday shaved off about 0.05% in returns of liquid funds. However, redemptions in the category were muted to the tune of R10,000-15,000 crore.
Last Tuesday, the sharp spike in short-term bond yields had led to panic selling in liquid schemes of mutual funds, with assets of most liquid schemes seeing an erosion of anywhere between 15% and 30% of AUM. Overall, the schemes saw sales of R40,000-50,000 crore, prompting the regulator to announce a special three-day repo window. Interestingly, the window has not been utilised by any of the fund houses so far.
Last week?s carnage in debt funds also put the spotlight on the systemic risks inherent in the MF industry owing to the high proportion of debt assets concentrated with a few fund houses. Nearly 50% of debt assets are with the top 5 fund houses ? HDFC MF, Reliance MF, ICICI Prudential MF, Birla Sun Life MF and UTI MF. Roughly 40% of liquid assets are with these fund houses.