Franklin Templeton crisis: Will RBI's Rs 50,000 cr relief comfort panicky MF investors?

Experts feel this was much needed to boost the confidence of panicky investors.

"The RBI's measure is aimed at confidence-building and to ensure that market functions normally and investors’ confidence remains on the mutual funds," Nilesh Shah, Managing Director at Kotak Mahindra Asset Management told CNBC-TV18.

"In 2013 taper tantrum crisis, when the RBI announced such measure, none of the mutual funds availed it because there was no need for it. In 2020 also, barring four mutual funds, which had Rs 4,400 odd-crore of borrowing, other mutual funds had zero borrowings as per an AMFI release. The bulk of this Rs 4,400 crore was just with one company," Shah said.

CARE Ratings said that the relief by RBI will ease 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, the rating agency said.

The market revered RBI measure as the Nifty50 rose 2.14 percent or 195.90 points to 9,350.30 and the BSE Sensex climbed 670.80 points or 2.14 percent to 31,998.02, backed by buying across sectors.

Banking and Financial Service index gained the most, rising around 3 percent each, while asset management companies like Nippon Life shot up 12 percent and HDFC AMC gained 5 percent.

"The measure will not only help mutual funds but also the bonds markets,"  A Balasubramanian, Managing Director and Chief Executive Officer for Aditya Birla Sun Life AMC told CNBC-TV18.

Ashwani Bhatia, Managing Director & CEO at SBI Mutual Fund feels it is a message largely to investors, mainly HNIs and institutions that this part of the financial market is safe and RBI is looking at financial markets very carefully.

He said on Friday there were some redemptions but it largely depended on the portfolio quality or portfolio of many funds. "Some may have had little and some may have had more redemptions, but by and large this is a wonderful step, much needed. And I am sure panic that was there, it won't go further from here."

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.

The 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.

"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," it added.

Experts feel this is a good lesson to mutual funds that they should properly follow the guidelines given by regulators.

"I am sure this is a lesson and MFs will follow the guidelines if you are taking exposure to duration funds or liquid funds. In debt funds, one looks at a return of 1-2 percent above fixed deposits rate and at the shortage he will be looking for a return of 1-2 percent above saving banks rate. Ultimately we are managing other people's money, this is certainly a big lesson for entire industry," Ashwani Bhatia of SBI MF said in an interview to CNBC-TV18.

"Going forward we will be very mindful of the fact that duration risk is duration risk and credit risk is credit risk and lets not mixed the two together and run for a yield," he added.

Here is what other experts said:

Joseph Thomas, Head of Research - Emkay Wealth Management

The closure of its six debt schemes by FT has resulted in eroding the confidence of investors to a large extent. This usually results in more redemptions and may lead to liquidity problems for the mutual fund industry, when many of them already have negative cash in debt funds. So, more than a crisis of liquidity, it is a crisis of confidence.

In order to bring back confidence, the RBI has announced the liquidity support measures for the mutual funds specifically. This will serve to alleviate the fears in the minds of investors and also dissuade many from getting into the redemption mode. Even then, the after effects of the low rated credit risk fund portfolios may haunt the mutual funds for some more time to come because of the economic slowdown and the resultant sluggishness in economic activity emanating from the pandemic. A timely and extremely laudable action from the RBI.”

Amit Singh, Head of Investica

In light of Franklin Templeton MF closing six debt funds schemes last week, Debt markets were on the edge especially with higher yields on Friday for lower-rated papers. As expected, RBI’s liquidity initiative announced on Monday will ease pressure and help mutual funds to finance the redemption using this facility rather than selling exiting papers at a discount and denting its Net Asset Value. We believe, that this measure will stabilise the performance of short-term debt funds and improve investor sentiment about the debt market.

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