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The Reserve Bank of India (RBI) has taken up the role of a rescuer yet again. The Rs 50,000 crore borrowing window announced by the central bank to cushion mutual funds from likely redemption pressure is a blessing for the industry in the context of the panic created by the abrupt closure of Franklin Templeton funds, said bankers and analysts.
“This step is positive. There was some sort of panic in the market despite assurances from the fund and the industry. There are concerns about likely redemption pressure. The RBI cushion will help calm the nerves,” said SV Sastry, Managing Director and CEO of SBI - DFHI.
"This move will help soothe the mutual fund industry, especially so given the redemption pressure that could have increased in the midst of an illiquid market. This can be looked upon as a modified extension of TLTRO for a short term of 90 days rather than 1 or 3 years dealing with a specific pain point in the industry," rating agency CARE said in a note.
"The RBI may hence be looked upon to come up with similar measures for other sectors as well as there are now precedents of specific windows open to NBFCs and mutual funds," the agency said.
“With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of Rs 50,000 crore,” the RBI said. Under the SLF-MF, the RBI will conduct repo operations of 90 days tenor at the fixed repo rate of 4.4 percent.
Funds availed under this window can be used by banks exclusively for meeting the liquidity requirements of MFs by extending loans, and undertaking outright purchase of investment-grade corporate bonds, commercial papers , debentures and certificates of deposit held by MFs, the RBI said. The scheme makes sense for banks as they can borrow at 4.4 percent from the RBI and lend at 2-2.5 percent margin.
On Thursday night, Franklin Templeton announced the closure of six funds — 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) effective April 23. Total assets under management of these funds are estimated around Rs 30,000 crore, it said.
This isn’t the first time the RBI is helping mutual funds industry. In 2008, in the aftermath of the global financial crisis, the RBI had stepped in to save the sector. The central bank then opened a special window to provide banks with funds to support mutual funds. The RBI then cut the amount of funds banks must keep in reserve, releasing more than $12 billion into the banking system, injected $13 billion via its daily overnight money market operations and introduced a temporary funding window for mutual funds.
In fact, in the recent days, the RBI has been announcing unconventional measures to help various stakeholders in the economy. Responding to the market situation, Governor Shaktikanta Das announced back-to-back measures to help the banks, non-banks and now MFs in the backdrop of the tough market conditions. The RBI has actively engaged with markets to ensure liquidity in the market to nullify the impact of COVID-19 crisis.
However, when it comes to NBFCs, the RBI measures have largely benefited the AAA-rated companies. The RBI did two rounds of Targeted Long Term Repo Operations (TLTRO). In the first round announced on March 27, the RBI did Rs 1 lakh crore worth of TLTRO.
The second round of auctions — TLTRO 2.0 for Rs 50,000 crore was announced on April 17. The first auction of TLTRO 2.0 conducted yesterday has however pointed to a muted response. Against the Rs 25,000 crore offered, the RBI received bids worth only half of the amount. This pointed towards higher risk aversion in the banking sector to lend to small NBFCs and MFIs despite the RBI offering cheaper money at 4.40 percent.
Announcing the MF window, the RBI also announced a few measures to make the scheme attractive for banks. Under this, liquidity support availed 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. This will mean, banks don’t have to fear about treasury losses on this portfolio. Also, exposures under this facility will not be reckoned under the Large Exposure Framework (LEF), the RBI said.
Further, banks don’t need to worry about additional priority sector lending burden since the funds borrowed under this window will not be reckoned for computation of priority sector targets/sub-targets. Also, this will be exempted from banks’ capital market exposure limits, the RBI said.