A group representing mutual fund distributors has asked India’s central bank to set up a special purpose vehicle (SPV) to provide liquidity for the non-AAA investments of debt MF schemes.
"...banks have provided liquidity to AAA segment of market and not to space which is stressed and facing liquidity issues. Subsequent to the announcement of winding up of schemes of Franklin Templeton, the Reserve Bank of India (RBI) announced further liquidity measures to provide liquidity to mutual funds but this too has been provided via the banks,” said the Foundation of Independent Financial Advisors (FIFA) in a note to the central bank. The note was also marked to the Securities and Exchange Board of India (Sebi), and the Finance Ministry.
FIFA referred to Franklin Templeton Mutual Fund’s announcement on April 23 that it would wind up six yield-oriented, managed credit funds in India, effective April 23, citing severe market dislocation and illiquidity caused by the coronavirus.
Banks can use a RBI window to extend liquidity to MFs through three routes: extending loans to MFs, giving out loans against collateral or outright buying of the commercial papers and debentures held by MFs.
However, banks may refrain from extending liquidity through this window, given the asset quality concerns on their own books and lack of good-quality collateral in the stressed portfolios of debt schemes.
“In the current scenario, an SPV can help to bridge the liquidity gap. These SPVs can also hold the debt securities in their HTM or hold to maturity books, to gain from the accruals. FT MF can also approach such an SPV to sell some of its non-AAA book, to expedite the process of repayments to investors,” said Dhruv Mehta, chairman of FIFA.
FIFA’s letter said the Franklin Templeton’s announcement had shook the confidence of all investors and it could create another wave of panic redemptions in debt schemes.
Global rating agency Fitch recently said that there can be more ‘gating’ in debt schemes, if liquidity doesn’t reach the fund houses. Gating entails suspension of fresh redemptions, which was one of the calls taken FT MF to deal with stress its portfolios. The agency pointed out that banks are likely to stay in risk-aversion mode as they look at conserving capital, and curb asset quality risks in their own book.