The Reserve Bank of India on Monday, stepped forward with a Rs 50,000 crore rescue plan to save mutual funds, days after Franklin Templeton wound up six of its debt and credit schemes with an aggregate AUM of Rs 36,000 crore.
The Reserve Bank of India on Monday, stepped forward with a Rs 50,000 crore rescue plan to save mutual funds, days after Franklin Templeton wound up six of its debt and credit schemes with an aggregate AUM (Asset Under Management) of Rs 36,000 crore. RBI said that it has taken note of the heightened volatility in capital markets, after the coronavirus breakout, and acknowledged that the volatility has imposed liquidity strains on mutual funds. The liquidity crunch at fund houses has intensified in the wake of redemption pressures related to the closure of some debt mutual funds. “The stress is, however, confined to the high-risk debt Mutual Funds segment at this stage; the larger industry remains liquid,” a notification issued by the Reserve Bank said.
The central bank under the special liquidity facility for mutual funds (SLF-MF) will conduct repo-operations for 90 days tenor at the fixed repo rate. “The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays). The scheme is available from today i.e., April 27, 2020 till May 11, 2020 or up to utilization of the allocated amount, whichever is earlier. The Reserve Bank will review the timeline and amount, depending upon market conditions,” the RBI notification read.
“The move is much needed to ease the liquidity stress on the MF industry. However, as has been seen in the TLRTO auctions, lenders will be cautious of credit strength before using this facility provided by RBI. Having said that, there will definitely be easing of liquidity and this move should also boost investor sentiment,” Karan Mitroo, Partner, L&L told Financial Express Online. Under the TLTRO 2.0 of the RBI, lenders have only subscribed to a little over Rs 12,000 crore from the 25,000 crore earmarked for small and medium non-banking finance companies.
Funds availed under the SLF-MF are to be used by banks exclusively for meeting the liquidity requirements of mutual funds by extending loans, and undertaking purchase of and/or repos against the collateral of investment-grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs. “Again it is through banks, therefore only good papers will get funded. The circular itself talks about investment-grade corporate bonds, commercial paper, and debentures, However, there is no clarity on the investment-grade here. Only if there is clarity, we can assess how much liquidity will flow in,” said Omkeshwar Singh, Head – RankMF, Samco Securities. Singh, on Friday, had pointed out that the risk aversion at banks is too high and that is making it hard for firms to secure loans. “The loss of confidence is across the sector. People have been appearing on TV interviews to calm their investors, they might not know what is the story at Franklin Templeton but they are trying to reassure their investors. Across the industry, people are firefighting this situation,” he added.
This Special Liquidity window will largely help in creating liquidity for particular schemes being challenged with redemptions, said Suren Kochhar, Senior President, Head of Sales and Marketing, YES AMC. “The test remains will liquidity be provided only for top rated securities as collaterals to the risk averse Banks. This move of Special Liquidity window by RBI through Banks will also provide a confidence to the investors & we could see a gradual drop in redemption pressures by the investors,” he added. The Secondary market traders will also feel comforted, according to Kochhar.
RBI said that the liquidity support availed under the SLF-MF would be eligible to be classified as held to maturity even in excess of 25% of total investment permitted to be included in the held to maturity portfolio. Exposures under this facility will not be reckoned under the Large Exposure Framework. “This will serve to alleviate the fears in the minds of investors and also dissuade many from getting into the redemption mode,” said Dr. Joseph Thomas, Head of Research – Emkay Wealth Management. Although the move is commendable, it does not ward-off risk assigned to low rated credit risk funds. “The after-effects of the low rated credit risk fund portfolios may haunt the mutual funds for some more time to come because of the economic slowdown and the resultant sluggishness in economic activity emanating from the pandemic.”