RBI’s credit window for mutual funds calms markets

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April 28, 2020 2:10 AM

Experts said the debacle at Franklin could lead to redemptions from other debt schemes. Investors could lose a big chunk of the Rs 25, 800 crore worth of assets held in the six debt schemes that Franklin has wound down.

RBI said in a release the funds drawn under the special facility by banks should be used exclusively for meeting the liquidity requirements of MFs.

While the Reserve Bank of India’s Rs 50,000-crore special line of liquidity for mutual funds (MFs) calmed the markets on Monday, experts believe there could be some redemptions by investors from debt schemes.
RBI announced the exclusive facility following the nervousness in the markets and apprehensions of large redemptions on Friday after Franklin Templeton wound down six debt schemes late on Thursday.

Experts, however, pointed out the RBI’s special window would not necessarily convince banks to buy illiquid paper from mutual funds. Ananth Narayan, professor-finance at SPJIMR told FE that, at best, it would help provide funding for mutual funds via banks against good quality paper. “Banks are likely to remain averse to credit risk in these uncertain times. Effectively the credit transmission has broken down due to risk aversion and hence liquidity itself will not solve the issue, “Narayan observed.

Fund managers, too, said banks may continue to buy only highly-rated paper from mutual funds. A Balasubramanian, MD&CEO, Aditya Birla Sunlife AMC, said banks have not been moving down the credit curve but staying towards the top. “They need to move down somewhat even while staying within investment grade,” Balasubramanian said.

Experts said the debacle at Franklin could lead to redemptions from other debt schemes. Investors could lose a big chunk of the Rs 25, 800 crore worth of assets held in the six debt schemes that Franklin has wound down. The industry manages close to Rs 15 lakh crore of debt investments. Nilesh Shah, MD & CEO of Kotak Mahindra AMC said the move was a good confidence building measure to ensure continued confidence of the investors in MFs and also allow the markets to function normally. Nimesh Shah, MD & CEO, ICICI Prudential AMC said the RBI’s objective in offering a special liquidity window was to reduce the stress building up in the corporate bond segment.

RBI said in a release the funds drawn under the special facility by banks should be used exclusively for meeting the liquidity requirements of MFs, either by lending to fund houses or by buying investment-grade corporate bonds, debentures, CPs and CDs held by MFs. The investment can be classified as held to maturity (HTM), even in excess of 25% of total permitted investment and will be excluded for computation of adjusted non-food bank credit as also exempt from banks’ capital market exposure limits. Moreover, the exposures under this facility will not be reckoned under the large exposure framework.

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