Leading mutual funds have told the government that they want banks to lower interest rates on loans given through a special borrowing window opened by the Reserve Bank of India to tide over the liquidity crisis. At a meeting with finance minister P Chidambaram on Tuesday, the funds also urged the government to ensure that banks did not refuse certificates of deposits and commercial papers as collateral while providing loans.
Chidambaram also met the heads of big state-run banks, Indian Banks’ Association (IBA) and Association of Mutual Funds of India (Amfi) to discuss the liquidity situation with mutual funds. ?We want commercial deposits of all banks and commercial papers to be accepted by banks and interest rate to be reasonable,? Amfi chairman AP Kurian told reporters after the meeting. ?We feel the lending rates are slightly higher. So we thought of flagging the issue,? he added.
Executives of Reliance Mutual Fund, UTI Mutual Fund and HDFC Mutual Fund attended the meeting. Chidambaram has directed IBA and Amfi to resolve the problems faced by mutual funds, Kurian said. IBA and Amfi have set up a panel which would meet occasionally to iron out difference and resolve the problems, he added.
RBI has opened a special repo window of Rs 60,000 crore where in banks can borrow at 7.5% for on-lending to fund houses and non banking finance companies. Banks have so far borrowed Rs 15,000 crore from this window and are lending these funds at upwards of 12%. State Bank of India chairman OP Bhatt said the lending rates for mutual funds would be in the range of 11-12% under this special facility.
The meeting was to ensure that the flow of liquidity from banks to mutual funds is made easy and they are able to meet redemption pressure when it happens, said Union Bank of India chairman MV Nair, who also attended the meeting. Indian Bank CMD S Sundara Rajan said his bank had recently given Rs 400 crore to a fund house at 12.5%.
The RBI last month opened the special window after there were reports of mutual funds facing redemption issues as the global financial crisis crippled the country’s money markets. Debt mutual funds are facing severe redemption pressure and have sold debt instruments worth Rs 26,081.80 crore in October and Rs 1,043 crore in November so far, as per Sebi data.
Over 50% erosion in stock prices coupled with sale of assets to tide over liquidity crunch have seen the asset under management of the mutual funds decline 18%, or Rs 97,000 crore, to Rs 4,31,901.42 crore from Rs 5,29,102.92 crore in October, according to Amfi data. The top five fund houses? Reliance MF, HDFC MF, ICICI Prudential, UTI MF and Franklin Templeton?have lost over Rs 45,000 crore.