The Reserve Bank of India's decision on April 27 to provide Rs 50,000-crore special liquidity facility for mutual funds (SLF-MF) is aimed at building investor confidence and ensuring stability in the industry, said Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Co Ltd and chairman, Amfi.
Talking to CNBC-TV18, Shah said the measure was aimed at making the investors feel that there was enough liquidity to meet the redemption requirement.
"The RBI's measure is aimed at confidence-building and to ensure that market functions normally and investors’ confidence remain on the mutual funds," Shah said.
The central bank’s move came after worries heightened that the collapse of six debt schemes of Franklin Templeton India would set off a redemptions crisis in the nation’s asset management industry.
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It was not a crisis situation in the mutual fund industry as most companies had zero borrowings as per AMFI data, he said.
"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.
The RBI has, on more than one occasion, said it remains vigilant and will take whatever steps necessary to mitigate the economic impact of the coronavirus outbreak and preserve financial stability.
"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," a release from the RBI said.
The central bank will conduct repo operations of 90 days tenor at the fixed repo rate. The scheme is available from April 27, 2020 till May 11, 2020, or up to utilisation of the allocated amount, whichever is earlier.
The Reserve Bank will review the timeline and amount, depending upon market conditions.
Funds availed under the SLF-MF will be used by banks exclusively to extend loans to mutual funds or undertake the outright purchase of and/or repos against the collateral ofinvestment-grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs, said RBI.