Can’t blame Corona for crisis, investment choice was poor
The debacle at Franklin Templeton AMC, which has wound down six of its debt income schemes, has prompted the Reserve Bank of India (RBI) to open a special credit window for banks to lend to mutual funds (MFs). The move has no doubt calmed the money and stock markets, but it is unlikely much of the corpus of Rs 50,000 crore will be used.
Given how risk-averse banks have been over the past year or so, they are not about to expose themselves to a weak AMC, and neither are they likely to buy any corporate paper—NCDs, CPs, etc—that isn’t of top-quality. Indeed, given there is so much surplus liquidity, they could have lent MFs money any time, they didn’t need extra resources.
If AMCs find themselves short of liquidity and are holding poor-grade paper, they have only themselves to blame. A glance at some of the portfolios—including Franklin’s schemes—shows a fair bit of the paper is of low-grade quality, and some of the names are, frankly, unrecognisable. That the quality of corporate paper has been deteriorating over the past few years is not news. That is what the clean-up in the banking system, which started in late 2015 and resulted in close to Rs 12 lakh crore of NPAs, was all about.
For some reason, fund managers chose not to learn from this exercise and went on to hold, or even purchase poor-grade paper. While it is a fact that the ratings agencies didn’t do their job—IL&FS was a glaring example of that—the fund managers needed to have done their homework. In a liberal, and often lax regulatory environment, funds continued to chase yields, not worrying too much about the quality of their portfolios. As long as the going was good—a rising tide lifts all boats kind of situation—they managed to survive. When their luck ran out and the problems surfaced—IL&FS, Essel Group, DHFL—they tried to bend the rules, resorting to measures such as stand-still agreements, until Sebi cracked the whip.
The problem with the MF industry is that the revenues are dependent on the size of the assets under management (AUM); to grow the corpus, they try to entice investors with higher yields, which then means they need to compromise on the assets. To be sure, not all the assets can be AAA, but in that case, the fund manager needs to be confident they can liquidate the paper in a time of crisis. It is shameful Franklin is blaming the current liquidity shortage for what is clearly a bad choice of assets. It is time Sebi prescribed a floor for the quality of assets held, and held fund managers responsible for poor performance; investors, for their part, must become more choosy.