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Business News/ Mutual Funds / News/  Mutual funds scramble to keep lid on Franklin impact, may ask for RBI’s help

Mutual funds scramble to keep lid on Franklin impact, may ask for RBI’s help

While a majority of fund houses say that the debt schemes are fairly liquid at this point but could get difficult in coming weeks if lockdown is not lifted
  • To meet the liquidity needs of mutual funds, RBI has allowed banks to avail of cheap funding under the TLTRO
  • Currently, banks are parking over ₹7 trillion in RBI’s reverse repo window as they avoid lending citing increased credit risk. (MINT_PRINT)Premium
    Currently, banks are parking over 7 trillion in RBI’s reverse repo window as they avoid lending citing increased credit risk. (MINT_PRINT)

    Mumbai: 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, seeking bank loans and a liquidity intervention from the Reserve Bank of India (RBI) to contain the fallout of large redemptions. As of 23 April, four fund houses had borrowed 4,427.68 crore from banks to manage redemption pressure, according to 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, said Dhirendra Kumar, founder of Value Research.

    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 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 trillion 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 seeking anonymity.

    “TLTRO was announced in March at a time when there was fear of liquidity in the market. However, not more than 1 trillion is utilized, which shows that liquidity is not an issue. We saw a similar situation since 2008 and MF industry has been managing risks well under Securities and Exchange Board of India guidance," said A. Balasubramanian, chief executive officer at Birla Sun Life AMC Ltd.

    According to Arvind Chari, head of fixed income and alternatives, Quantum Advisors Pvt. Ltd, the main concern is risk aversion.

    “Despite all the actions taken by RBI, the financial system remains frozen but for government bonds, PSU bonds and strong AAA-rated corporates. The rest still find it difficult to access the bond market, and that acts as a feedback loop that further increases risk aversion among investors," said Chari.

    Investor sentiment has taken a big knock. The market is constantly looking out for the next weak bank, the next NBFC to default and the next credit risk fund to redeem.

    To manage these risks, mutual funds are aggressively writing down bad exposures to prevent outflows, said a distributor on condition of anonymity.

    For instance, BOI Axa Credit Risk Fund lost 50.22% of its value on 24 April on account of a mark down of various securities by the fund house. Aditya Birla Sun Life Medium Term Fund was down 4.72% overnight on 24 April due to a markdown of an IL&FS Special Purpose Vehicle company.

    “We are simply aligning the security to valuation suggested by external valuation agencies," said Balasubramanian.

    With inputs from Neil Borate & Nasrin Sultana

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    Jayshree P Upadhyay
    Jayshree heads a team of reporters focussing on legal, regulatory, investigative stories. She has worked for over a decade, reporting on financial scams, legal stories and the intersection of corporate and regulatory issues. She is based in Mumbai and has previously worked with Business Standard, Mint, The Morning Context and Bloomberg TV India.
    Catch all the Mutual Fund news and updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
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    Published: 26 Apr 2020, 05:07 PM IST
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