RBI to Resurrect Investors Confidence in Debt Funds
The Reserve Bank of India has opened a special 90-day liquidity facility for mutual funds which are facing redemption pressure. The facility comes after Franklin Templeton decided to wind-down six credit schemes, locking in nearly Rs 30,000 crore in investor funds.
The winding-up of its six yield-oriented, managed debt funds last week, Franklin Templeton shook the confidence of a large number of retail investors in debt fund schemes. The COVID-19 pandemic resulted in many investors selling off their positions in the market across the world with hardly a few buyers. Banks not willing to lend, parked their excess funds with RBI. This led to the absence of liquidity in the market followed by voluntary action by Franklin Templeton to wind up funds.
The Central Bank provides a parachute to Debt Funds:
Removing any cause for worry Early Today, The Reserve Bank of India has provided a special credit line of Rs 50,000 cr to banks to support debt fund redemptions. This has opened a special 90-day liquidity facility for mutual funds which are facing redemption pressure. The funds will be available at the existing repo rate, which is currently 4.4 percent. The statement from the central bank also said that ‘the Reserve Bank will review the timeline and amount, depending upon market conditions.’
The RBI stated that a set of conditions which essentially clarified that the quality of this exposure will not affect the bank’s larger asset quality parameters. This will come under the SLF MF and Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by extending loans, and undertaking the outright purchase of repo against the collateral of investment-grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs, RBI said.
Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.’ The central bank also said that exposures under this facility will not be reckoned under the large exposure framework. Coupled with the low repo rate, this should allay any fears that banks had about lending to mutual funds.
Do Investors need to worry about this?
As we look at these measures by the Central Bank they come as big relief for investors. The Central Bank acting quick and decisive would help to boost confidence and reduce the volatility seen in the debt market. The investor will receive their money back as and when liquidity is available to the AMC by either selling securities or receiving maturity proceeds