RBI opens a Rs 50,000 crore special funding line for MFs – Times of India

MUMBAI: The RBI on Monday provided a special facility with an initial corpus of Rs 50,000 crore for mutual funds to borrow from it using the banking channel.
Last week’s surprise step by Franklin Templeton MF to wind down six of its debt funds, that was managing nearly Rs 25,900 crore before closing down, is believed to have expedited the central bank’s decision to open such a facility. It is open till May 11.
Under RBI’s new facility, named Special Liquidity Facility for Mutual Funds (SLF-MF), banks are allowed to borrow from the central bank for a maximum of 90 days and then in turn lend the money to mutual funds against collateral in their portfolio. After 90 days, the fund houses will have to repay the bank and take back the collateral deposited. The banks in turn will return the money to RBI.
“This will be available to all liquidity adjustment facility — eligible banks against eligible collateral and can be availed only for onlending to mutual funds,” an RBI release noted.
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 exigencies of coronavirus pandemic-related disruptions, fund houses have been demanding a similar line of funding from the central bank. Earlier, such special fund facilities were used during the global financial crisis in 2008 and during the currency crisis in 2013.
Nilesh Shah, chairman of the fund industry trade body AMFI, said the RBI move was a “confidence-building measure” which will ensure continued confidence of MF investors and also normal functioning of the markets. “The MF industry continues to be on sound footing both on portfolio quality as also on the liquidity front, despite an isolated incident in these challenging times,” Shah said. On Friday, top office-bearers at AMFI 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. Top bankers said that since the credit risk would be on their books, they would be willing to pass on liquidity support to mutual funds if they are confident of the quality of collateral offered. This means that while mutual funds would find it easy to raise money selling bonds of public sector undertakings or triple A-rated companies, they may find it difficult to offload bonds of those availing a moratorium on payments.
Sector analysts believe the RBI announcement is likely to reduce volatility in bond yields which is being witnessed due to spike in redemptions.
According to Karthik Srinivasan, group head, financial sector rating, ICRA, “With excess liquidity of around Rs 4.85 lakh crore as on April 24, banks, however, continue to remain largely risk-averse. We expect the liquidity of the higher-rated papers to improve on the back of this facility. Accordingly, active participation from the banks will be key to the success of this scheme.”
In Video:Former Finance Minister Chidambaram welcomes RBI’s liquidity boost of Rs 50,000 crore for mutual funds