Banks on April 28 borrowed only Rs 2,000 crore under the Reserve Bank of India’s (RBI) special liquidity window for mutual funds (MF). The Rs 50,000 crore facility, open until May 11, is aimed at easing the liquidity pressure on funds.
Under the facility, banks can submit bids to avail funding from Monday through Friday, “but the response so far has been poor,” Marzban Irani, CIO-Fixed Income, LIC MF told the Hindu BusinessLine.
The reason why banks are cautious in availing this facility is that they prefer 'AAA'-rated debt instruments or at best 'AA'-rated instruments of microfinance institutions (MFIs), housing finance companies (HFCs) and non-banking finance companies (NBFCs). But there is not much interest in instruments with lower ratings.
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Many fund houses have already offloaded high rated papers to ease pressure at the onset of the coronavirus and the ongoing economic slowdown. Banks prefer to stay away from credit-risk in case the papers have been downgraded.
To avail the Rs 50,000 crore liquidity window till May 11, set up for the mutual fund (MF) sector by the RBI, funds will be allowed to borrow against investment-grade credit risk schemes.
Industry officials, however, are concerned this may not be enough as banks may be unwilling to accept the majority of the low-rated securities as collateral.
RBI’s liquidity window came after Franklin Templeton had closed six funds citing financial crunch due to the COVID-19 situation.
“I don’t see banks taking lower-rated corporate debt as collateral, which has been lacking in liquidity. If we see heavy redemption in schemes which carry large exposure to lower-rated corporate debt, liquidity will remain a problem,” Arvind Chari, head of fixed income, Quantum Advisors, told ET.Follow our full COVID-19 coverage here