Banks wary of lending to debt funds despite aid

MUMBAI: Despite the ₹50,000 crore special liquidity window announced on Monday, banks may remain wary of lending to debt mutual funds, industry executives said, worsening liquidity concerns of the sector which has been facing redemption pressure.

“What debt markets are facing currently is lack of risk appetite in the market and not a liquidity concern. There is ample liquidity in the system. However, due to the uncertainty around the impact of covid-19 on the economy and sustainability of businesses, there is risk aversion among investors,” said Ashwani Bhatia, managing director of

SBI Mutual Fund.

Bhatia is worried that good quality non-AAA papers are not finding any takers either, as everyone is concerned about the impact of the covid-19 crisis on these businesses and their ability to repay debt. “As the key concern in the debt market currently is the lack of risk appetite, regulatory support in the non-AAA segment would help the market. Similar to the targeted long-term repo operations announced by the RBI for investment grade papers, there is also a need for a specific action on the nonAAA segment. Unless banks are not incentivised for investing in other than investment grade papers, the current issue might sustain,” Bhatia stressed.