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Friday, June 05, 2020

Pressure on MFs: Finmin takes note of Franklin, in talks with SEBI and RBI

SEBI had written to RBI in March itself impressing upon it the need to provide a liquidity window for mutual funds.

Written by George Mathew , Sunny Verma , Sandeep Singh | Mumbai, New Delhi | Updated: April 27, 2020 8:09:31 am
Pressure on MFs: Finmin takes note of Franklin, in talks with SEBI and RBI Former Sebi Chairman UK Sinha had in an article in The Sunday Express warned that the mutual fund problem can swiftly migrate to the entire financial services industry, and then soon to the real economy.

The finance ministry is in discussion with regulators, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) to address mutual funds’ need for liquidity and prevent panic selling in debt funds triggered by the abrupt closure of six credit schemes by Franklin Templeton Mutual Fund on Thursday.

A senior government official, who did not wish to be named, said “(it) looks more of a liquidity issue rather than a credit risk problem”. “The finance ministry has taken note of the developments and is engaging with the regulators how best it can be resolved,” he said.

Read | Net asset values of Franklin Templeton’s FoF schemes fall by up to 25%

Capital market regulator Sebi, which was aware of the developments that led to the shutdown of the schemes, is in constant touch with the Association of Mutual Funds of India, the nodal agency for mutual funds, and the RBI, to assess the dynamic situation. In fact, Sebi had written to RBI in March itself impressing upon it the need to provide a liquidity window for mutual funds. “It has, however, not yet happened,” said a source in the government, who also did not wish to be named.

The debt fund segment had turned volatile since March and witnessed outflows of Rs 1.94 lakh crore and is staring at further outflows, especially in the Rs 55,000 crore credit risk fund segment because the Templeton move has shaken the confidence of investors. The total corpus of debt schemes shrunk to Rs 10.29 lakh crore as on March 31, 2020.

Recommending an early intervention, former Sebi Chairman UK Sinha had in an article in The Sunday Express warned that the mutual fund problem can swiftly migrate to the entire financial services industry, and then soon to the real economy.

In October 2008, at the peak of the global financial crisis, the RBI had opened a special liquidity repo window for mutual funds. Again, in July 2013, when returns on debt mutual funds dropped sharply with rupee falling significantly against US dollar, the RBI opened a special window to ease the redemption pressure.

The finance ministry and Sebi did not respond to queries sent by The Indian Express.

Sources in the MF industry indicated the RBI may have to consider direct purchases of non-government securities. It could be either through a dedicated liquidity window or through the creation of a special purpose vehicle to house some of these non-debt securities which have become illiquid in the near term, but could command full value at redemption.

When the IL&FS fiasco hit the financial sector two years ago, the RBI had opposed a Finance Ministry proposal to open a special liquidity window for NBFCs. During the 2008 global financial crisis though, it had announced a 14-day special repo facility to provide liquidity for the non-banking financial sector.

This time around, the challenges are more systemic and can have wider ramifications, a mutual fund industry veteran who is interacting with regulators said. The liquidity issue is affecting not just the mutual funds, but also many NBFCs. The RBI’s approach of persuading banks to subscribe to these non-government debt papers does not seem to be working. “Central banks across the world are doing asset purchases to support the financial sector,” the industry veteran said.

Last week, banks largely ignored the Rs 25,000-crore targeted long term repo operations (T-LTRO) conducted by the RBI, indicating their reluctance to bail out troubled NBFCs and micro-finance institutions (MFIs). Of the Rs 25,000 crore RBI put on the T-LTRO window Thursday, banks took only Rs 12,850 crore (three-year tenor). The RBI offers T-LTRO funds at the repo rate of 4.4 per cent.

Mutual fund sources said there are indications of redemption pressure in the debt segment. Last week, the net asset values (NAVs) of three BOI AXA debt schemes fell up to 50 per cent after the fund house said it would markdown its exposure in select debt securities in its portfolio. Franklin Templeton’s fund of funds (FoFs) schemes, which invest in other mutual fund schemes lost up to 25 per cent in NAV. These FoFs have exposure to Franklin Templeton’s six credit schemes which were wound up due to heavy redemption pressure.

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