Last week, Franklin Templeton Mutual Fund shut six of its open-ended debt funds, effective April 23.
The Reserve Bank of India (RBI) on Monday announced a Rs 50,000 crore special liquidity facility for mutual funds as redemptions rose after Franklin Templeton closed six debt mutual funds last week.
The scheme is available from 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.
RBI said, "Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom."
The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid, RBI said.
Last week, Franklin Templeton Mutual Fund shut six of its open-ended debt funds, effective April 23. “Due to the on-going novel coronavirus, or COVID-19, pandemic, liquidity in the bond market has dried up. Yields of debt securities have risen sharply and that has materially diminished the abilities of companies to service their debt. Mutual funds have also been getting a lot of redemption requests. We felt it best under these circumstances to wind up these funds and return the money to investors,” Sanjay Sapre, President, Franklin Templeton – India, said.
These six schemes are:
- Franklin India Low Duration Fund (FILDF),
- Franklin India Dynamic Accrual Fund,
- Franklin India Credit Risk Fund,
- Franklin India Short Term Income Plan,
- Franklin India Ultra Short Bond Fund, and
- Franklin India Income Opportunities Fund (FIIOF).
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RBI further said, "Under the SLF-MF, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate."
Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by extending loans, and undertaking outright purchase of repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs, RBI said.ALSO READ: There is no free lunch with high-risk debt funds. Ask Franklin
RBI said, "Liquidity support availed under the SLF-MF would be eligible to be classified as held to maturity (HTM) even in excess of 25 percent of total investment permitted to be included in the HTM portfolio."
It concluded, "Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). The face value of securities acquired under the SLF-MF and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets. Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits."Follow our entire coverage of Franklin Templeton India crisis here.