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Mutual funds (MFs) are concerned that the collapse of six Franklin Templeton India debt schemes will trigger a redemption crisis in the nation’s asset management industry.
Asset managers are cutting back on bad investments and looking for bank loans, and a liquidity intervention by the Reserve Bank of India (RBI) to contain the consequences of large repayments. As of April 23, four fund houses had borrowed Rs.4,427.68 million from banks to manage redemption pressure, according to the Mutual Fund Association in India, or Amfi.
While most asset managers claim that their debt schemes will be able to meet the bailout pressure at this point, things could get more difficult if the shutdown doesn’t lift soon. In such a case, managing the swaps would require a direct RBI line of credit.
Credit markets in India have been under pressure even before the coronavirus pandemic. The national 40-day blockade to stem the spread of the virus has only escalated the problems facing debt markets, which were already grappling with slowing growth, borrower defaults and a liquidity constraint that has left most of non-bank Indians struggling.
Franklin Templeton’s problems are linked to his aggressive bets on bonds of low-rated companies, the most affected in the current crisis.
“The debt market would require steps from RBI; There is no liquidity crisis, but confidence needs to be kept high. Sometimes it takes the form of a line of credit, and in extreme cases central banks have bought bonds and have not trusted banks, “Milind Barve, managing director of HDFC Asset Management Co. Ltd., said in an interview with CNBC TV 18. RBI’s line of credit is the last resort and shouldn’t 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 said nothing about the crisis in the mutual fund industry.
Former finance minister P. Chidambaram, in a statement Saturday, called on the Center to act promptly to stop any cascading effects of the unprecedented closure of six debt funds. He referred to the liquidity window opened 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 Rs 20 billion to allow banks to raise money and lend to funds, but received only four offers for £ 3.5bn rupees. Similarly, in 2013, RBI opened a special three-day repo window that allowed banks to borrow a total of ₹ 25 billion crore at an interest rate of 10.25% to help mutual funds overcome their problems. liquidity.
“The liquidity window given to mutual funds at that time had calmed the market. It was more of a psychological step, ”said a retired central banker on condition of anonymity.
RBI has allowed banks to use cheap funds under long-term repo operations (TLTRO) and use them to acquire up to 50% of the holdings of the primary market issues and the remaining 50% of the secondary market, including mutual funds and non-bank financial companies (NBFC).
According to Nilesh Shah, managing director of Kotak Mahindra Asset Management Co. Ltd and president of Amfi, NBFCs need more funds. “There are some NBFCs rated AAA, AA, A, and some even lower. The flow of credit is available from the capital markets to the highest rated NBFCs, where most mutual fund portfolios are invested. We have to make sure that credit is also available at the lower end of the credit curve, “Shah said.
Banks are currently parking more than ₹ 7 lakh crore in the RBI reverse repo window as they prevent loans from mentioning higher credit risk from companies affected by the shutdown.
“The funds are available at cheaper rates and the banking system is flooded with liquidity. Mutual funds need money. Hence, the demand for a line of credit. So we need to create a structure in which someone removes that credit risk from the banks, ”said a private sector banker on condition of anonymity.
TLTRO was announced in March at a time when there was fear of liquidity in the market. However, no more than ₹ 1 lakh crore is used, proving that liquidity is not an issue. We saw a similar situation since 2008 and the MF industry has been managing risks well under Sebi’s direction, “said A. Balasubramanian, CEO of Birla Sun Life AMC Ltd.
Neil Borate and Nasrin Sultana contributed to this story.
