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RBI’s special liquidity facility for mutual funds: Will it boost confidence?

Most mutual funds are of the view that RBI’s move will instill confidence in fund houses, particularly the ones struggling with redemptions.
Apr 27, 2020 / 11:37 AM IST

The Reserve Bank of India (RBI), on April 27, announced a special liquidity facility for mutual funds worth Rs 50,000 crore as redemptions rose after Franklin Templeton closed six debt mutual funds last week.

The RBI's liquidity infusion has provided a sigh of relief for most mutual funds, particularly the ones struggling with redemptions.It will also instil confidence among customers, they hope, and thereby reducing the pressure on liquidity.

Most mutual funds are of the view that RBI’s move will instill confidence in fund houses, particularly the ones struggling with redemptions.

“This is a huge confidence boosting measure by RBI. Now, investors and advisors should feel confident that the industry has tools to deal with the redemption pressure, if any, and thus the panic situation will subside. That itself should slow down redemptions. So, overall sentiment will remain positive,” said Mahhendra Jajoo, CIO-Fixed Income, Mirae Asset Global Investments.

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."

This comes in the wake up of Franklin Templeton Mutual Fund shut six of its open-ended debt funds, effective April 23.

"Brilliant move by RBI to bring confidence to mutual fund investors and also will help to calm down the corporate debt market," said George Heber Joseph, CEO & CIO, ITI MF.

“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,” said Sanjay Sapre, President, Franklin Templeton-India.

Ankur Maheshwari, CEO, Equirus Wealth said that Given the incident about winding up of 6 debt oriented schemes of Franklin Templeton, there was much anxiousness and concern among investors, specially retail clients. In such a situation, RBI announcing the Special Liquidity Facility for Mutual Funds will provide comfort to mutual fund investors and preserve financial stability. Also, while banks had sufficient liquidity already, this is a reassuring step that the Regulator is ready to support the markets as and when required.

Now the question arises will most fund houses rush to use this special liquidity facility?

Will MFs avail this facility

In the past too, during two instances in 2008 (Lehman Brothers crisis)and 2013 (taper tantrum crisis) RBI had opened a special liquidity window for mutual funds but many fund houses had not availed the facility.


In 2008, the central bank opened a special 14-day repo window of Rs 20,000 crore to enable banks to raise money and lend to the funds, but had received only four bids for Rs 3,500 crore then.


Similarly, in 2013, RBI had opened a special three-day repo window that allowed banks to borrow a total of Rs 25,000 crore at a rate of 10.25 percent to help mutual funds tide over their liquidity issues.


According to mutual fund distributors, Franklin Templeton MF redemptions did not get aggravated around April 23, but the trouble started earlier.  Its March factsheet indicated that they were struggling.


Franklin Templeton Mutual Fund troubles are largely due to its aggressive bets on lower-rated company bonds.


Most large fund houses which comprises almost 70 percent of the industry have investments in liquid securities and have improved their cash chest simply by anticipating redemptions.


“Many mutual funds including large AMCs have communicated to us that their schemes have between 40-60 percent assets in liquid securities like cash treasury bills, government securities (G-secs) and highly liquid AAA rated papers,” said Amol Joshi, a Mumbai-based Mutual Fund Distributor from PlanRupee Investment Services said.


Concurring to Joshi,  another distributor said that fund houses like Kotak Mutual Fund, Aditya Birla Sun Life Mutual Fund and IDFC Mutual Fund had zero borrowings.


SEBI regulations allow mutual funds schemes to borrow up to 20 percent of their assets to meet liquidity needs for redemption / dividend pay-out.


However, as of April 23, 2020 out of the 42 mutual funds only four mutual funds, including the affected mutual fund, had borrowings, aggregating to Rs 4,427.68 crore.


In March, investors pulled out total Rs 1.1 lakh crore from liquid funds against an outflow of Rs 43,825 crore in February. It was the biggest outflow from the category since Rs 1.4 lakh crore in September 2019.


How MFs can avail?


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.


As a comparison, during 2008-09 global financial crisis, the debt MF schemes were facing strong redemption pressures beyond their scheme cash positions. The CP papers held by MFs were not finding a market to sell their securities and honour redemptions.

" With SEBI consultation, RBI had then opened a Rs 20000 crores daily liquidity borrowing window through banking system for mutual funds for around a month" , quipped an ex SEBI DGM who worked in MF department during that period. "Once corporate redemption pressure tides over, MFs would return these borrowings by selling their securities" added the officer.

Himadri Buch
first published: Apr 27, 2020 11:37 am
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