Signalling support: On RBI relief for mutual funds
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The Reserve Bank of India’s decision to open a special facility to ensure the availability of adequate ( satisfactory or acceptable in quality or quantity) liquidity for the mutual fund industry is a timely move in signalling to investors that the central bank is alert to the need to preserve financial stability in these challenging times. In assigning ₹50,000 crore exclusively for commercial banks to lend to mutual funds, the RBI made clear on Monday that it wants to tamp ( ram or pack (a substance) down or into something firmly) down on any build-up of liquidity ( Cash ) strains ( make severe or excessive demands on) at mutual fund houses in the wake of heightened ( more intense than normal) volatility ( for the worse) in the capital markets and increased redemption ( the action of regaining or gaining possession of something in exchange for payment, or clearing a debt) pressures as a fallout of the COVID-19 pandemic.
The proximate ( closest in relationship; immediate) trigger for the central bank’s move was last week’s announcement by Franklin Templeton Mutual Fund that it was winding ( a twisting movement or course) up six debt funds — funds that collectively had assets ( a useful or valuable thing or person) under management (AUM) amounting to about ₹26,000 crore. The RBI has rightly recognised the urgent need to ward off any incipient ( beginning to happen or develop) contagion ( the spreading of a harmful idea or practice) impact from the closure of these six funds. With the overall industry-wide AUM for debt funds at about ₹15-lakh crore, it was crucial for the banking regulator to reassure ( say or do something to remove the doubts or fears of (someone)) investors that liquidity need not be a concern while deciding on whether to retain or redeem ( compensate for the faults or bad aspects of) their investments in these mutual funds.
The Association of Mutual Funds in India (AMFI) had, separately, last week, sought ( attempt to find (something)) to assure investors that a majority of debt fund schemes had “invested in superior credit quality securities” and had appropriate liquidity to back their normal operations.While the facility is a straightforward 90-day repo-based lending window from which banks can avail credit to provide loans to mutual funds, there are concerns about the banking industry’s willingness to expose itself to the credit risk involved in making these fresh loans.
That the RBI was cognisant of this is evident in the way that the norms have been tailor-made ( make or adapt for a particular purpose or person) to incentivise the banks to lend. From allowing banks to breach ( break or fail to observe (a law, agreement, or code of conduct)) their 25% ceiling on held-to-maturity investments as a consequence ( a result or effect, typically one that is unwelcome or unpleasant) of lending to mutual funds, to exempting ( free (a person or organization) from an obligation or liability imposed on others) the support extended from banks’ overall capital market exposure limits, the central bank has sought to ease the flow of credit to the fund houses.
Still, if the recent experience of getting lenders to support the non-banking financial companies through a targeted long-term repo operation backed by ₹50,000 crore is any pointer, clearly the banking industry — beset ( (of a problem or difficulty) trouble (someone or something) persistently) by bad loans — appears to have little appetite for adding any credit that it deems ( regard or consider in a specified way) risky. Moreover, with the economy still in lockdown and the credit ratings of even relatively well-established companies facing a real and not-too-distant ( reserved ; not paying attention) threat of downgrades, how willing banks would be to use this facility to lend to debt mutual funds remains to be seen. The Centre may need to be ready to step in with direct intervention ( involvement) if the RBI’s gambit ( an act or remark that is calculated to gain an advantage, especially at the outset of a situation) fails to ease the pressure on mutual funds.