MFS utilise just 5% from central bank’s credit line

The credit line opened by the Reserve Bank of India (RBI) for debt mutual funds (MFS) saw limited participation, with ~2,430 crore of the ~50,000-crore liquidity window utilised.

According to industry participants, MFS showed preference for selling securities to banks and other counter parties, instead of availing of fresh borrowing through RBI’S credit line. “MFS looked to sell debt papers in the markets to banks or other counter parties. As a result of this selling, debt papers of some non-banking financial companies (NBFCS) had also seen some spike,” said a debt fund manager.

On April 27, the RBI opened a two-week ~50,000-crore special liquidity facility for MFS after Franklin Templeton MF’S move to wind up six of its credit-oriented schemes led to redemption risks for other debt schemes in the industry. The window was to be kept open till May 11.

Under the window, banks could give liquidity support to MFS via three routes — extending loans to MFS, giving out loans against collateral, and outright buying of commercial papers and debentures held by MFS. On banks’ request, the RBI allowed regulatory benefits of window to banks even if they used their own resources to extend liquidity to MFS without tapping into RBI’S resources. The exact quantum of banks’ own resources deployed towards MFS couldn’t be ascertained.

The RBI had allowed banks to hold bonds purchased from MFS under this liquidity programme, in held-to-maturity book even if it was in excess of 25 per cent of the total permitted investment.

“Banks would have used the liquidity window to buy debt papers from MFS rather than lend,” said another fund manager.

Experts say redemptions are now under control. “RBI’S liquidity window offered a large corpus to debt MFS, which allayed investor nerves. Also, yields on non-aaa papers have now eased by 20-25 basis points, showing some easing of strain in the markets,” said a fund manager.

In March, several debt schemes had seen significant negative cash balances in their portfolios, amid heightened redemption pressures triggered by the Covid-19 pandemic and implementation of the lockdown. In some of the cases, the borrowing was close to 20 per cent of the scheme’s assets, which was the regulatory ceiling.

“Debt MFS may have also avoided fresh borrowing to make sure their portfolios are well within the 20-per cent limit stipulated by the Securities and Exchange Board of India,” said a senior executive of another fund house.