RBI Announces Rs 50,000 Crore Special Liquidity Facility for Mutual Funds Post Franklin Templeton Crisis

The Reserve Bank of India (RBI) is opening a special liquidity facility of up to Rs 50,000 crore to help mutual funds tide over a severe liquidity strain imposed by the coronavirus pandemic and redemption pressures, it said on Monday.

Fund houses in India have struggled to allay investors' fears of a flood of redemption requests after the prominent Franklin Templeton Mutual Fund said on Thursday it would wind up six credit funds for lack of liquidity.

"The stress is, however, confined to the high-risk debt mutual fund segment at this stage; the larger industry remains liquid," the RBI said in its statement.

It said it would conduct repo operations for 90 days' tenor at the fixed repo rate and the funds will be available on-tap and open-ended.

After the news, the NSE banking index extended gains to trade nearly 3% higher, while shares of asset managers reversed session losses to trade higher.

HDFC Asset Management Co rose as much as 6.48%, while Nippon Life India Asset Management Ltd jumped as much as 12.7%, its biggest one-day gain since March 2019.

Analysts had mixed views over the success of the move, as banks would not necessarily lend to high-risk funds though the presence of a window would itself help calm investors' nerves, they said.

"It's good, hope is retained that the corporate bond market will improve on liquidity and credit spread after 90 days of pay back time of SLF-MF scheme," said J. Moses Harding, an independent strategist and consultant who was formerly a banker.

"Banks would be seen comfortable to lend to top quartile, similar to non-bank finance companies, but appetite will be low on others from counterparty risk."

Banks will need to access the funds from the RBI at the repo window and extend loans to mutual funds, buy outright investment grade corporate bonds or commercial papers or certificates of deposits from them or extend the funds against collateral through a repo.

Exposures under this facility will not be reckoned under the large exposures framework and stand to be classified as "held-to-maturity", even in excess of the permissible 25% of total investments, the central bank added.

The RBI will review the timeline and amount depending on market conditions, it added.