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Mutual funds scramble to keep lid on Franklin impact
So far, the Securities and Exchange Board of India (Sebi), RBI and the government have not said anything about the crisis in the mutual funds industry.
Mutual funds (MFs) are worried that the collapse of six debt schemes of Franklin Templeton India will set off a redemptions crisis in the nation’s asset management industry.
Asset managers are marking down bad investments and seeking bank loans, and a liquidity intervention from Reserve Bank of India (RBI) to contain the fallout of large redemptions. As of April 23, four fund houses had borrowed ₹4,427.68 crore from banks to manage redemption pressure, as per Association of Mutual Funds in India, or Amfi.
While most asset managers claim their debt schemes will be able to meet the redemption pressure at this point, things could get tougher if the lockdown isn’t lifted soon. In such a case, managing redemptions would require a direct credit line from RBI.
Credit markets in India have been under pressure even before the coronavirus pandemic. The 40-day nationwide lockdown to stem the spread of the virus has only intensified the problems faced by debt markets, which were already grappling with slowing growth, defaults by borrowers and a liquidity squeeze that has left most of India’s non-banks struggling.
Franklin Templeton’s troubles are linked to its aggressive bets on lower-rated company bonds, the worst affected in the current crisis.
“Debt market would require steps from RBI; there isn’t a liquidity crunch, but there is a need to keep the confidence high. Sometimes, it is in the form of a line of credit and sometimes, in an extreme case, central banks have themselves purchased bonds and not relied on banks,” Milind Barve, managing director of HDFC Asset Management Co. Ltd, said in an interview with CNBC TV18. RBI’s line of credit is the last resort and should not be free money, Dhirendra Kumar, founder of Value Research, said.
So far, the Securities and Exchange Board of India (Sebi), RBI and the government have not said anything about the crisis in the mutual funds industry.
Former finance minister P. Chidambaram, in a statement on Saturday, asked the Centre to act promptly to stop any cascading effect of the unprecedented closure of six debt funds. He referred to the liquidity window opened up in 2008 as a possible solution. The central bank had opened a special window for commercial banks to meet the cash requirements of mutual funds in 2008 and 2013. In 2008, the central bank opened a special 14-day repo window of ₹20,000 crore to enable banks to raise money and lend to the funds, but received only four bids for ₹3,500 crore. Similarly, in 2013, RBI opened a special three-day repo window that allowed banks to borrow a total of ₹25,000 crore at a rate of interest of 10.25% to help mutual funds tide over their liquidity problems.
“The liquidity window given to mutual funds at that time had calmed the market. It was more of a psychological step,” a retired central banker said on condition of anonymity.
RBI has allowed banks to avail of cheap funding under the targeted long-term repo operations (TLTRO) and use it to acquire up to 50% of the holdings from primary market issuances and remaining 50% from the secondary market, including from mutual funds and non-banking finance companies (NBFCs).
According to Nilesh Shah, managing director of Kotak Mahindra Asset Management Co. Ltd and chairman of Amfi, NBFCs need more funding. “There are some AAA, AA, A rated NBFCs and some even lower. Credit flow is available from capital markets to higher-rated NBFCs where a majority of mutual fund portfolios are invested. We have to ensure that credit is available at lower end of credit curve as well,” said Shah.
Currently, banks are parking over ₹7 lakh crore in RBI’s reverse repo window as they avoid lending citing increased credit risk from companies affected by lockdown.
“Funds are available at cheaper rates and the banking system is awash with liquidity. Mutual funds need money. Hence, the demand for a credit line. So, we need to create a structure where somebody will take that credit risk away from banks,” a private sector banker said on condition of anonymity.
“TLTRO was announced in March at a time when there was fear of liquidity in the market. However, not more than ₹1 lakh crore is utilised, which shows that liquidity is not an issue. We saw a similar situation since 2008 and MF industry has been managing risks well under Sebi guidance,” said A. Balasubramanian, chief executive officer at Birla Sun Life AMC Ltd.
Neil Borate and Nasrin Sultana contributed to this story.
