through two routes. Banks can borrow funds from the statutory
facility for them from the RBI and lend to MFs against their collateral debt securities, or buy commercial papers or corporate debentures from the MFs. Following Rs 1.9 trillion outflows from debt schemes in March 2020, credit-oriented categories have continued to see further exits in April.
According to the available data, the credit risk fund category saw its assets under management
(AUM) dip by another 12 per cent in April to Rs 48,392 crore, followed by a medium duration fund, where the AUM was down by another 9 per cent to Rs 25,502 crore.
Industry executives said the RBI credit line was a much-needed support, considering that redemption pressures were expected to exacerbate after Franklin Templeton’s surprise move to wind up six of its credit-oriented schemes with combined net assets of Rs 25,000 crore.
“It’s a good confidence-building measure to ensure continued confidence of investors in the MF industry as also normal functioning of the markets,” said Nilesh Shah, managing director of Kotak MF, and chairman of the Association of Mutual Funds in India.
The move was also seen as a positive by the corporate debt markets, as corporate bond yields fell 10-15 basis points (bps) after the announcement. “Market participants were trying to reduce their exposure to corporate bonds, given the worries over liquidity following Franklin’s move. However, there has been some easing on that front,” said a senior bond trader with a private bank.
Experts say the impact of the move will depend on how banks and MFs come to terms on the valuations of the bond exposures. “This liquidity window via banks may not be effective to resolve the current problem. Banks are extremely risk averse in taking any credit exposure in their books,” said Arvind Chari, head-fixed income and alternatives at Quantum Advisors.
“Portfolios that may need liquidity lines would be those with some issues. We will have to see how open banks are to offer liquidity lines to such schemes,” said Vidya Bala, co-founder of Primeinvestor.in.
Observers are concerned given the lack of interest shown by banks in the targeted loan term repo operations. Sources suggest banks may avoid buying securities from MFs, and stay cautious on their lending.
“Fund houses are not willing to take even a slight haircut or sell their portfolio even at par value. They want to book profit here, too, why banks should be interested?” said a banker at a PSU bank.
Banks are also closely looking at investment patterns of MFs.
“Corporate bond investments are risky in this environment. About 30 per cent of funds with MFs are deployed in corporate bonds, 27 per cent in cash, equity and gold bonds. About 17 per cent are invested in commercial papers. The total investment corpus in AA, A, BBB papers is Rs 1.2 trillion,” said a treasury official at a private bank.
According to a person familiar with the RBI’s thinking, banks availing liquidity under this window will be asked to produce proof of buying MF papers or portfolios. “If the RBI finds banks are taking the liquidity line and not actually helping the MFs, they can be heavily penalised,” the person said.