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Mutual funds make limited borrowing from Reserve Bank's credit lines

Experts say fund houses preferred to sell bonds to banks, instead of borrowing

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SI Reporter 

The credit lines opened by the Reserve Bank of India (RBI) for debt (MFs) saw limited participation, with Rs 2,430 crore of the Rs 50,000-crore liquidity window utilised.

According to industry participants, MFs showed preference for selling securities to banks and other counter parties, instead of availing of fresh borrowing through RBI’s credit lines.

“MFs looked to sell debt papers in the to banks or other counter parties. As a result of this selling, debt papers of some non-banking financial companies (NBFCs) had also seen some spike,” said a manager.

On April 27, the RBI opened a two-week Rs 50,000-crore special liquidity facility for MFs after Franklin Templeton MF’s move to wind up six of its credit-oriented schemes led to redemption risks for other debt schemes in the industry. The window was to be kept open till May 11.

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Under the window, banks could give liquidity support to MFs via three routes — extending loans to MFs, giving out loans against collateral, and outright buying of commercial papers and debentures held by MFs.

On banks’ request, the RBI allowed regulatory benefits of window to banks even if they used their own resources to extend liquidity to MFs without tapping into RBI’s resources. The exact quantum of banks’ own resources deployed towards MFs couldn’t be ascertained.

The RBI had allowed banks to hold bonds purchased from MFs under this liquidity programme, in held-to-maturity book even if it was in excess of 25 per cent of the total permitted investment.

“Banks would have used the liquidity window to buy debt papers from MFs rather than lend,” said another fund manager.

Experts say redemptions are now under control. “RBI’s liquidity window offered a large corpus to debt MFs, which allayed investor nerves. Also, yields on non-AAA papers have now eased by 20-25 basis points, showing some easing of strain in the markets,” said a fund manager.

In March, several debt schemes had seen significant negative cash balances in their portfolios, amid heightened redemption pressures triggered by the Covid-19 pandemic and implementation of the In some of the cases, the borrowing was close to 20 per cent of the scheme’s assets, which was the regulatory ceiling.

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“Debt MFs may have also avoided fresh borrowing to make sure their portfolios are well within the 20-per cent limit stipulated by the Securities and Exchange Board of India,” said a senior executive of another fund house.

Even though net outflows continued in several debt categories in April, intensity of redemptions showed easing. From outflows of Rs 11,000- 30,000 crore in categories such as short duration, low duration, and ultra-short duration, the outflows have come down to Rs 2,000-6,000 crore for these categories.

However, credit-oriented categories, such as credit risk fund and medium duration, saw redemptions intensifying in April. For credit risk funds, the net outflows were at Rs 19,238 crore in April and Rs 6,363 crore for the medium duration.

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On Wednesday, Finance Minister Nirmala Sitharaman announced more liquidity measures for NBFCs, which is also expected to ease liquidity pressures in the debt

The government allocated Rs 30,000 crore to buy investment-grade debt of NBFCs, housing finance companies, and microfinance players. Under this scheme, the securities will be fully guaranteed by the Government of India.

The minister also announced extension of partial credit guarantee scheme for to cover their liabilities. Under the scheme, the first 20 per cent of loss will be borne by the Government of India.

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First Published: Fri, May 15 2020. 18:28 IST