How SEBIs new MF exposure norms will affect NBFCs

SEBI yesterday reduced the company-, group- and sector-wise limits that debt mutual fund schemes can have. It also reduced the additional sector exposure granted for NBFCs from 10 percent to 5 percent of a scheme's corpus. This may mean NBFCs will have to look for alternate means of financing.
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Jan 12, 2016, 05.48 PM | Source: CNBC-TV18

How SEBI's new MF exposure norms will affect NBFCs

SEBI yesterday reduced the company-, group- and sector-wise limits that debt mutual fund schemes can have. It also reduced the additional sector exposure granted for NBFCs from 10 percent to 5 percent of a scheme's corpus. This may mean NBFCs will have to look for alternate means of financing.

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How SEBIs new MF exposure norms will affect NBFCs

SEBI yesterday reduced the company-, group- and sector-wise limits that debt mutual fund schemes can have. It also reduced the additional sector exposure granted for NBFCs from 10 percent to 5 percent of a scheme's corpus. This may mean NBFCs will have to look for alternate means of financing.

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R Sivakumar (more)

Head - Fixed Income, Axis Mutual Fund |

The decision by market regulator Securities and Exchange Board of India (SEBI) to tighten exposure norms for debt mutual fund schemes is likely to have an impact on non-banking financial companies (NBFcs).

SEBI yesterday reduced the company-, group- and sector-wise limits that debt mutual fund schemes can have. It also reduced the additional sector exposure granted for NBFCs from 10 percent to 5 percent of a scheme's corpus. This may mean NBFCs will have to look for alternate means of financing.

Discussing the impact of the move, R Sivakumar, Head - Fixed Income of Axis Mutual Fund said that while overall exposure for schemes is currently lower than the limit, the threshold in some individual schemes may have been crossed.

In another interview, V Raghu, ED of Repco Home Finance said this measure by Sebi is not going to impact the operations of the company as it has been in the bond market for only about a year and the total borrowing via bonds is only about 7 percent.

Below is the verbatim transcript of R Sivakumar’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: What is the total industries exposure to this paper? We got some data saying that the overall industry exposure is only 15 percent so way-off that 30 percent limit. What is your number?

Sivakumar: I agree that when you look at the overall number it would be much lower than the limit currently allowed. Having said that certain types of funds for example liquid funds, you may find that the exposure from time to time does come very close to the limits allowed. Similarly in closed end funds, fixed maturity plans (FMPs) for example we have seen the exposures coming very close to that level. So, in certain categories of funds you will find the exposures getting hit. However, across the board I would agree with you that it is not going to be a problem.

Sonia: Can you just give us some more numbers. Is the bond dependency of housing finance companies very high and what would that number be, the percentage?

Sivakumar: If you look at the current rules, you can do 30 percent in total financials or in any one sector but specifically for financials, 30 percent across the financial sector. There is an additional 10 percent for housing finance but subject to the fact that housing finance as a sector itself is less than 30 percent. So, the new rules will have to wait it and how it distinguishes but the idea is that housing finance companies, Securities and Exchange Board of India (Sebi) saw as something that it requires stable financing from the Mutual Funds and therefore allow for us somewhat higher exposure. I think that continue, we will therefore see perhaps 5 percentage fall in the exposure that mutual funds have to housing finance companies so some 30 percent perhaps becomes 25 percent.

Latha: Overall limit, you all have not reached even for housing finance companies, right?

Sivakumar: Correct, across the mutual fund industry we have not reached that kind of a sector limit but specific schemes may have reached those limits.

Latha: So far an housing finance companies (HFC) the chances are that what one liquid fund sells another funds can still buy. I mean for an HFC is it that their cost of funds will go up?

Sivakumar: On aggregate it will because most of the funds even though they have on aggregate below what this means is that the ones who are at the limit will be forced to cut but the ones who are already running well below the limit may just well choose to hold the existing positions which they have chosen to maintain. So, on aggregate it is expected that the demand for financial bonds and commercial papers including housing finance will drop as a result of this circular.

Sonia: Do you know exactly how much HDFC’s deposit share could be in the total funding?

Sivakumar:If you look at all the housing finance companies they are significant issuers in the bond markets and the money markets. So, across the board housing finance companies will get affected by this limit. Obviously, it is only going to affect to the extent of perhaps 5 percent of the mutual fund holding. So, it is going to have some affect but not much.

Latha: Any of the specific non banking financials companies (NBFCs) which are over exposed?

Sivakumar: I don’t think so; I think if you look at most mutual funds are running reasonably diversified especially in the money market fund. So I think that is not going to be a big effect.

Ekta: Now that non-banking finance companies (NBFC) are going to be treated as one sector and the single party exposure for example, for mutual funds have come down to 10 percent versus 15 percent earlier and housing finance company (HFC) exposure is possibly going to be reduced as a whole to 5 percent versus 10 percent. How would that impact a company such as Repco Home Finance? Could you detail how much, what your borrowing profile currently is?

Raghu: I do not think this measure by SEBI is going to impact the operations of Repco Home Finance to any extent because we have been into a bond market for almost about a year now and total borrowings through the bond route is only around 7 percent. Out of that, the investment by mutual funds into the bonds of this company are around 5 percent. So, I do not think, we are nowhere near the limit being set around 10 percent per issuer limit. So, this is not going to have any impact on a company like Repco now.

Ekta: So, your cost of funds does not change in any way?

Raghu: Not expecting any change in the cost of funds because of this measure.
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