Stringent norms for MF sector on cards

The mutual fund industry is set to get some stringent provisioning norms in respect of non-performing assets if the recommendations made ...

The mutual fund industry is set to get some stringent provisioning norms in respect of non-performing assets if the recommendations made to the Association of Mutual Funds of India AMFI are any indication.

In case of debt instruments, the recommendations say that the fund should make provisions where the interest has not been paid for a quarter. In fact, provision should be made immediately after the first quarter against the bad debt.

Further, if the interest is not paid for the second quarter too then an increased amount of provisioning should be made and so on. AMFI is scheduled to meet some time in the middle of May to thrash out the final details on the provisioning norms.

Managing director of SBI Mutual Fund, Niamatullah, who is heading the committee formulating the norms explained that the reason for immediate provision lay in the fact that the net asset value, which are usually released on a daily or weekly basis, becomes inflated to the extent of the NPAs.

Another significant suggestionmade is that the NPA norms should also take into account the age of the debt, in which investments have been made. 8220;One or two members have suggested changes in the norms,8221; Niamatullah told PTI, adding that they would be meeting in May in order to come to an agreement on the suggestions made.

The members prefer to follow their own methodologies in respect of valuation of non-traded debt securities. Since it is not always possible to value debt instruments which are not traded, he said, members were of the view that it should be left to the funds to value them.

At present debt instruments are evaluated on their yields to maturity, which, however, does not reflect the true market value of the instruments. AMFI is also expected to discuss some additional measures8217; in respect of such securities, Niyamatullah said.

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The committee has observed that the scheme should be structured in such a way so that the possibility of doubtful debts are fully factored in. NPAs, especially in respect of debt instrumentshas come to be of some concern to the mutual funds industry, due to the mass downgrading in their credit ratings during the fag end of 1998 and in the early part of this year.