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MUMBAI : India’s debt mutual funds have cut their exposure to non-banking financial companies (NBFCs) to almost half since 2018, data from the Securities and Exchange Board of India (Sebi) showed, as underlying asset quality concerns and shaky repayment abilities drove fund managers to sectors perceived as less risky.

Over the past year, NBFCs have faced severe asset-liability mismatches with many of them struggling to raise short-term loans from lenders, including mutual funds.

In June last year, Dewan Housing Finance Corp. Ltd (DHFL), one of India’s best-known mortgage lenders, defaulted on unsecured commercial paper payment.

In September, Altico Capital India Ltd, a lender to real estate companies, defaulted on interest payments, highlighting the rising stress in India’s shadow banks.

According to the latest data from Sebi, mutual fund investments in debt instruments of NBFCs was at 1.37 trillion in June, down 48% from 2.64 trillion in July 2018.

In June 2018, MFs’ exposure to NBFCs was at 2.33 trillion. Accordingly, the percentage share of total funds deployed by mutual funds into NBFCs also declined to 9.2% in June from 19% in July 2018.

Investment in commercial papers of NBFCs had been on a consistent decline every month till May but have risen marginally in June 2020 to 0.54 trillion from 0.44 trillion in March 2020.

Post September 2018, after the liquidity crisis in the NBFC space, MFs withdrew over half of their investments from this category. The percentage share of funds deployed by MFs in corporate debt paper of NBFCs in June moderated to 0.84 trillion from 0.94 trillion in March.

According to Sanjay Agarwal, senior director, Care Ratings, confidence of investors of debt mutual funds in NBFCs was shaken after the IL&FS crisis.

“Following the IL&FS crisis, mutual funds withdrew their debt funds from many NBFCs, leading to an overall drying up of liquidity... However, MF withdrawal from NBFCs seems to have plateaued as currently, most MF exposure is to NBFCs with strong parentage or significant ownership by government of India."

IL&FS, an infrastructure development and finance firm, defaulted on its debt in 2018, triggering a liquidity crisis in the financial services market.

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