Mutual funds reduce exposure to shadow banks by ₹67,000 crore

As a liquidity crisis unfolded in India’s shadow banking sector beginning September, mutual funds that had lent heavily to these companies till then raced to cut their risk, shedding their exposure by ₹67,000 crore in the next few months.

Still, mutual funds continue to have a massive ₹3.12 trillion exposure to non-banking financial companies (NBFCs) and housing finance companies (HFCs), a Mint analysis of the latest data available till 31 April shows, adding up to 12.5% of their overall assets under management.

Asset managers have been hurtling from crisis to crisis in the NBFC segment, beginning with a series of defaults by Infrastructure Leasing and Financial Services Ltd group companies in September 2018. The collapse forced fund managers to write off their nearly ₹3,000 crore investment in non-banks.

The mutual fund industry received a fresh jolt in June after credit rating agencies downgraded debt papers of Dewan Housing Finance Ltd (DHFL).

Asset management companies (AMCs) have a cumulative exposure of ₹5,336 crore to DHFL, spread across 165 mutual fund schemes. However, DHFL paid out its obligation to fixed maturity plans of Reliance Mutual Fund on 7 June.

The crisis has forced mutual funds to change their ways of lending to NBFCs and HFCs. From an exposure of ₹3.79 trillion in September, AMCs have been reducing it every month by not rolling over their debt and selling their loans to them.

According to the disclosures by mutual funds, the top five NBFCs where AMCs have reduced exposure are Indiabulls Group, Piramal Group, DHFL group, IIFL Holdings Ltd and Edelweiss Group.

However, the decision by AMCs to reduce exposure to these NBFCs seems to be driven more by sentiment because none of them, barring perhaps DHFL, is facing a liquidity crisis.

“Many NBFCs have liquidity, but sentiment towards the sector is not favourable, which is perhaps the reason for such a swing in exposure,” said Arvind Chari, head of fixed income at Quantum Mutual Fund. “Some of the sentimental concern is based on balance sheet related to real estate exposure or simply the worry that will the NBFC find refinancing or not.”

There have been exceptions, too.

During the same period, funds have increased their exposure to NBFCs such as Bajaj Finance Ltd, Muthoot Finance Ltd, HDB Financial Services (a unit of HDFC Bank), Kotak Mahindra Investments Ltd and Sundaram Finance Ltd.

“This signifies that AMCs are perhaps not gloomy about the NBFC story and do not see it as a systemic issue,” said the head of fixed income fund at a large-sized AMC. “Even in NBFCs where we have reduced exposure, we are still convinced of the story. We are adhering to client demands to reduce our exposure to certain NBFCs and HFCs.”