Non-performing asset (NPA), a term usually used in banking to denote loans that stop yielding interest or go into default, is not part of the mutual fund vocabulary, but funds facing the heat in investments made into fixed-income securities of real estate companies and other troubled entities have demanded comfort levels similar to banks, but with no luck yet.
The Association of Mutual Funds of India (AMFI) has said that the existing norms will continue and there is no need for a change. “It is not required as the loans are getting rescheduled and there doesn’t seem to be an issue,” said AP Kurien, chairman, AMFI. “The existing NPA norms will continue.”
Banks often get comfort in central banking rules concerning NPA accounting or through the injection of capital to strengthen the balance sheet.
In a situation where several mutual funds had exposure to real estate companies and were suffering from repayment from them, many fund houses proposed with the industry body AMFI to have NPA norms similar to banks.
An industry official who asked not to be identified told Hindustan Times that if the NPA treatment norm is made similar to what banks have, then it won’t get reflected in the net asset value of the scheme (NAV) which would send misleading signals.
In such a case, investors will suffer greater loss at the time of redemption when a fund closes as smarter, bigger investors would have redeemed at unrealistic NAV levels.
“In a mutual fund if there is an NPA, it should get reflected in the NAV and the effect should be born by all the unit holders equally,” said the industry official.