Franklin Templeton impact: RBI announces Rs 50,000 cr special liquidity facility for mutual funds
The RBI said heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds
The Reserve Bank of India (RBI) on Monday announced a Rs 50,000 crore special liquidity facility for mutual fund, days after Franklin Templeton Mutual Fund decided to close six debt schemes.
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.
— CNBC-TV18 (@CNBCTV18Live) April 27, 2020
In a statement, the central bank said heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom.
The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid, it said.
"With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of Rs 50,000 crore," it said.
Under the SLF-MF, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays).
Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by extending loans, and undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs, CNBC-TV18 said.
Liquidity support availed under the SLF-MF would be eligible to be classified as held to maturity (HTM) even in excess of 25 percent of total investment permitted to be included in the HTM portfolio, RBI said.
Further, exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). The face value of securities acquired under the SLF-MF and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets.
Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits, RBI added.
The scheme is available from 27 April, 2020 till 11 May, 2020 or up to utilization of the allocated amount, whichever is earlier.
The RBI will review the timeline and amount, depending upon market conditions.
The RBI also stressed it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability.
Amit Singh, Head, Investica-an online platform for investing in mutual funds said: "In light of Franklin Templeton MF closing six debt funds schemes last week, debt markets were on the edge especially with higher yields on Friday for lower-rated papers. As expected, RBI’s liquidity initiative announced Monday will ease pressure and help mutual funds to finance the redemption using this facility rather than selling exiting papers at a discount and denting its Net Asset Value. We believe, that this measure will stabilize the performance of short-term debt funds and improve investor sentiment about the debt market.”
--With inputs from agencies
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