Banks and the Reserve Bank of India (RBI) have deployed close to Rs 8,000 crore to ease the liquidity pressure in the mutual fund industry in April and May.
The data compiled by the RBI shows banks deployed Rs 5,522 crore from their own resources under the Special Liquidity Facility for Mutual Funds (SLF-MF) scheme for Rs 50,000 crore announced by the regulator. This is in addition to Rs 2,430 crore availed from the RBI under the SLF-MF scheme.
In March-April 2020, mutual funds faced redemption pressure due to volatility in capital markets. Their woes intensified after closure of six debt MF schemes by Franklin Templeton MF. On April 27, the RBI introduced SLF-MF with several regulatory benefits in order to ease liquidity pressure on MFs. The funds availed under SLF-MF were to be used by banks exclusively for meeting the liquidity requirements of MFs by extending loans and undertaking outright purchase or repos against the collateral of investment grade corporate bonds, commercial papers and debentures held by MFs.
On April 30, the regulatory benefits announced under the SLF-MF scheme were extended to banks, which deployed their own resources. While easing the redemption pressure on MFs, these measures also helped to increase the trading volume in the secondary market for corporate bonds.
The RBI’s liquidity offer brought some degree of comfort in the debt market which was under huge redemption pressure. Faced with huge redemptions, Franklin Templeton had closed six credit schemes, effectively locking up Rs 28,000 crore of investors’ money.
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