Even as there is a growing concern around redemption pressure on debt mutual funds in the country and the Reserve Bank of India on Monday announced a special liquidity window worth Rs 50,000 crore for the industry, following Franklin Templeton’s decision to wind up six credit funds, a report prepared by Morgan Stanley says that since mutual funds (MFs) have already shifted significantly towards stronger borrowers, the downside risk is contained.
“Recent events at credit risk funds have increased risk of redemptions at debt mutual funds. However, we think a big shift in AUM mix over the past 18 months towards stronger borrowers should mitigate this risk,” it said.
Data on deployment of funds by MFs available on Sebi’s website shows that between March 2019 and March 2020, MFs moved towards safer assets. The overall exposure of debt assets under management (AUM) to government securities rose from 3.98 per cent to 8.49 per cent over the last year. They also raised their holding of PSU bond/debt from 11.85 per cent to 15.09 per cent in the same period. Besides, the share of MF allocation to treasury bills and collateralised borrowing and lending obligations rose by 3.9 per cent and 4.96 per cent, respectively.
On the other hand, exposure to commercial paper of non-banking financial companies (NBFCs) reduced from 8.13 per cent last March to 3.33 per cent in March 2020. The exposure to corporate debt (NBFCs) declined from 8.46 per cent to 7.19 per cent in the same period. MFs even reduced the share of investment in commercial paper of companies other than NBFCs from 18.98 per cent to 13.75 per cent over the last one year, and they also cut exposure to banks’ certificate of deposits from 15.49 to 10.16 per cent.
While credit risk funds that have come under pressure now, constitute 5 per cent of overall mutual fund debt AUM, the report said that NBFCs/HFCs with strong parentage constitute more than 80 per cent of MF debt exposure to NBFCs/HFCs. It further said that lenders facing funding constraint represent around 5 per cent of overall mutual fund debt exposure to NBFCs/HFCs.
“We think further downside risks to mutual fund exposure to the NBFC/HFC segment are contained. We note that of a sample of 25+ leading NBFCs/HFCs for which we were able to get granular funding data, the share of mutual funds in overall borrowings is down from 18 per cent in Sept-18 to 12 per cent as of Dec-19. However, for entities facing funding constraints, it is down more sharply, from 28 per cent to 6 per cent,” said the Morgan Stanley report.
It further noted that while mutual fund debt investments in NBFCs/HFCs have been a big contributor to their growth between FY14 and first half of FY19, mutual funds have been cutting debt exposure to them on account of decline in AUM as well as risk aversion and regulation. The report indicated that with this development, along with banks turning risk-averse towards NBFCs, in turn raises a potential funding risk to NBFC segment.
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