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MUMBAI: The RBI on Monday provided a special facility with an initial corpus of Rs 50,000 crore for mutual funds to borrow through the banking channel.
The surprise move by Franklin Templeton MF last week to liquidate six of its debt funds, which managed about Rs 25.9 billion before closing, is believed to have accelerated the central bank’s decision to open the facility. It is open until May 11.
Under the new RBI line, called the Special Mutual Fund Liquidity Line (SLF-MF), banks can borrow from the central bank for up to 90 days and then, in turn, lend the money to mutual funds against collateral. in your wallet. After 90 days, the fund houses will have to reimburse the bank and recover the deposited guarantee. The banks in turn will return the money to RBI.
“This will be available to all liquidity adjustment facilities: eligible banks against eligible guarantees and can be used only for loans to mutual funds,” a RBI statement said.
Mutual fund body upbeat, but banks remain cautious
Since March 27, the day RBI announced its first stimulus package to help the economy cope with the demands of disruptions related to the coronavirus pandemic, fund houses have been demanding a similar line of financing. from the central bank. Previously, such special funds were used during the global financial crisis in 2008 and during the currency crisis in 2013.
Nilesh Shah, chairman of the AMFI fund industry trade body, said the RBI measure was a “confidence-building measure” that will ensure the continued confidence of MF investors and also the normal functioning of markets. “The MF industry continues to perform well both as a portfolio and on the liquidity front, despite an isolated incident in these difficult times,” Shah said. On Friday, top officials in the AMFI office had said that Franklin Templeton MF’s decision to close six funds was an “isolated incident” and did not reflect the state of the fund industry as a whole.
Banks, however, are cautious. Leading bankers said that since credit risk would be on their books, they would be willing to transfer liquidity support to mutual funds if they trusted the quality of the guarantee offered. This means that while mutual funds would find it easy to raise money by selling bonds from public sector companies or triple A-rated companies, they may have difficulty downloading the bonds from those who take advantage of a payment default.
Industry analysts believe that the RBI announcement is likely to reduce volatility in bond yields, which is being watched due to increased redemptions.
According to Karthik Srinivasan, group leader, financial sector rating, ICRA, “with excess liquidity of around Rs 4.85 lakh crore as of April 24, banks, however, remain largely risk-averse. We hope that the liquidity of the highest rated papers will improve at the back of this facility. Consequently, the active participation of banks will be key to the success of this scheme. ”
Video: Former Finance Minister Chidambaram celebrates RBI’s liquidity increase of Rs 50 billion for mutual funds
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The surprise move by Franklin Templeton MF last week to liquidate six of its debt funds, which managed about Rs 25.9 billion before closing, is believed to have accelerated the central bank’s decision to open the facility. It is open until May 11.
Under the new RBI line, called the Special Mutual Fund Liquidity Line (SLF-MF), banks can borrow from the central bank for up to 90 days and then, in turn, lend the money to mutual funds against collateral. in your wallet. After 90 days, the fund houses will have to reimburse the bank and recover the deposited guarantee. The banks in turn will return the money to RBI.
“This will be available to all liquidity adjustment facilities: eligible banks against eligible guarantees and can be used only for loans to mutual funds,” a RBI statement said.
Mutual fund body upbeat, but banks remain cautious
Since March 27, the day RBI announced its first stimulus package to help the economy cope with the demands of disruptions related to the coronavirus pandemic, fund houses have been demanding a similar line of financing. from the central bank. Previously, such special funds were used during the global financial crisis in 2008 and during the currency crisis in 2013.
Nilesh Shah, chairman of the AMFI fund industry trade body, said the RBI measure was a “confidence-building measure” that will ensure the continued confidence of MF investors and also the normal functioning of markets. “The MF industry continues to perform well both as a portfolio and on the liquidity front, despite an isolated incident in these difficult times,” Shah said. On Friday, top officials in the AMFI office had said that Franklin Templeton MF’s decision to close six funds was an “isolated incident” and did not reflect the state of the fund industry as a whole.
Banks, however, are cautious. Leading bankers said that since credit risk would be on their books, they would be willing to transfer liquidity support to mutual funds if they trusted the quality of the guarantee offered. This means that while mutual funds would find it easy to raise money by selling bonds from public sector companies or triple A-rated companies, they may have difficulty downloading the bonds from those who take advantage of a payment default.
Industry analysts believe that the RBI announcement is likely to reduce volatility in bond yields, which is being watched due to increased redemptions.
According to Karthik Srinivasan, group leader, financial sector rating, ICRA, “with excess liquidity of around Rs 4.85 lakh crore as of April 24, banks, however, remain largely risk-averse. We hope that the liquidity of the highest rated papers will improve at the back of this facility. Consequently, the active participation of banks will be key to the success of this scheme. ”
Video: Former Finance Minister Chidambaram celebrates RBI’s liquidity increase of Rs 50 billion for mutual funds
