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Asset managers are cutting back on bad investments, seeking bank loans and a liquidity intervention from the Reserve Bank of India (RBI) to stem the consequences of large repayments. As of April 23, four fund houses had borrowed ₹Rs 4,427.68 million to manage bailout pressure, according to the Mutual Funds 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 is 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. with CNBC, said in an interview. 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 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 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 repos window of ₹Rs 20 billion to allow banks to raise money and lend to funds, but only received four offers for ₹Rs 3.5 billion. Similarly, in 2013, RBI opened a special three-day repo window that allowed banks to borrow a total of ₹Rs 25 billion at an interest rate of 10.25% to help mutual funds overcome their liquidity problems.
“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 available at the lower end of the credit curve as well, “Shah said.
Banks are currently parking ₹$ 7 trillion in RBI’s reverse repo window as they avoid lending by citing increased 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. Therefore, we need to create a structure in which someone removes that credit risk from banks, “said a private sector banker seeking anonymity.
TLTRO was announced in March at a time when there was fear of liquidity in the market. However, no more than ₹1 trillion 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 the guidance of the Indian Securities and Exchange Board, “said A. Balasubramanian, CEO of 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 corporations. 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, “Chari said.
Investor sentiment has taken a big hit. The market is constantly looking for the next weak bank, the next NBFC in default, and the next credit risk fund to trade.
To manage these risks, mutual funds are aggressively scoring bad exposures to avoid exits, a dealer said on condition of anonymity.
For example, BOI Axa Credit Risk Fund lost 50.22% of its value on April 24 due to a multi-value downgrade by the fund house. The medium-term fund Aditya Birla Sun Life fell 4.72% overnight on April 24 due to a downgrade by an IL&FS special-purpose vehicle company.
“We are simply aligning security with the valuation suggested by external valuation agencies,” said Balasubramanian.
With contributions from Neil Borate and Nasrin Sultana
