Just days after Franklin Templeton Asset Management Company announced closure of six of its debt fund schemes, the Reserve Bank of India (RBI) has stepped in with a special liquidity facility of Rs 50,000 crore for the mutual fund industry, as it looks to avert the crisis from spreading.
“Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds, which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom,” the central bank said on Monday.
Franklin Templeton, the country’s eighth largest fund house, late on Thursday announced it was winding up six of its fixed income schemes--Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund--“due to severe market dislocation and illiquidity caused by the COVID-19 pandemic.”
These funds had cumulatively around Rs 25,000 crore in assets under management.
This unprecedented move by the fund house had led to concerns that the troubles may spread to other fund houses’ debt fund categories like credit risk funds. The RBI has also said that the stress is confined to the “high-risk” debt MF segment at this stage and the larger industry remains liquid.
“The closure of its six debt schemes by Franklin Templeton has resulted in eroding the confidence of investors to a large extent. This usually results in more redemptions and may lead to liquidity problems for the mutual fund industry, when many of them already have negative cash in debt funds,” said Joseph Thomas, head of research at Emkay Wealth Management.
As of March 31, 2020, the average assets under management of the mutual fund industry stood at Rs 24.70 lakh crore according to Association of Mutual Funds of India (AMFI). The net assets under management of debt oriented schemes as of March 31 stood at Rs 10.29 lakh crore.
Under the special liquidity facility for mutual funds (SLF-MF), the RBI will conduct repo operations of 90 days tenor at the fixed repo rate. It will be an on-tap and open-ended facility and banks can submit their bids to avail funding on any day from Monday to Friday, excluding holidays. The scheme will be available from April 27 (Monday) till May 11 or up to the utilisation of the allocated amount, whichever is earlier, the central bank said.
“Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by (1) extending loans, and (2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by Mfs,” RBI said.
The move will serve to alleviate the fears in the minds of investors and also dissuade many from getting into the redemption mode, said Thomas.
Credit ratings agency CARE Ratings also said the RBI SLF will help soothe the mutual fund industry.
“This can be looked upon as a modified extension of TLTRO (targeted long-term repo operations) for a short term of 90 days rather than 1 or 3 years dealing with a specific pain point in the industry,” it said.
This special repo window will be available to all LAF (liquidity adjustment facility) eligible banks against eligible collateral and can be availed only for on-lending to mutual funds, the central bank said. The minimum bid amount would be Rs 1 crore and in multiples thereof.
While the banks will decide the tenor of lending to/repo with mutual funds, the minimum tenor of repo with RBI will be for a period of three months, RBI added.
As per the Securities and Exchange Board of India regulations, mutual fund schemes can borrow up to 20 per cent of their assets to meet liquidity needs for redemption or dividend pay-out. There are 42 mutual fund houses in India and as of April 23, four mutual funds, including Franklin Templeton, had borrowed Rs 4,427.68 crore, according to data from AMFI.
This is not the first time that the RBI has come to the aid of the mutual fund industry. In the backdrop of the global financial crisis in 2008, the RBI had opened a similar window so that mutual funds could meet their liquidity requirements. Similarly in 2013, the central bank had opened a special window of Rs 25,000 crore for banks to meet the liquidity requirements of mutual funds.
