The Reserve Bank of India (RBI) today announced a Special Liquidity Facility (SLF) of Rs. 50,000 crore to the Mutual Fund industry. The Indian stock markets cheered the RBI announcement as the Sensex surged 750 points shortly after the release.
The announcement was made in a bid to ease liquidity measures on Mutual Fund Houses which are facing redemption pressure after Franklin Templeton halted redemptions from six of its debt mutual funds last week.
The Central Bank stated that the Covid-19 lockdown has ‘Heightened volatility in capital markets’ and has ‘imposed liquidity strains on mutual funds (MFs)’.
It also added that,” Redemption pressures related to closure of some debt mutual funds intensified liquidity strains. The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid.”
The RBI scheme is available from April 27 to May 11 or up to utilisation of the allocated amount, whichever is earlier. RBI will review the timeline and amount, depending on market conditions. It will conduct repo operations of 90 days tenor at the fixed repo rate.
The Central Bank release also said, “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).”
The regulator said that the funds availed under the SLF-MF have to be used by banks exclusively for meeting the liquidity requirements of mutual funds by:
1. Extending loans
2. 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.
As an added incentive, RBI said that any liquidity support availed under the SLF-MF would be eligible to be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio.
“Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). The face value of securities acquired under the scheme 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,” RBI said.
Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.
Franklin Templeton Mutual fund shut six of it’s open-ended debt funds effective from April 23.
In a press statement Sanjay Sapre, President, Franklin Templeton – India said, “The decision to wind up these funds was an extremely difficult one, but we believe it is necessary to protect value for our investors and presented the only viable means to secure an orderly realization of portfolio assets.”
“We remain fully committed and aligned with the interests of our investors and aim to assist the Trustees to fully exit the managed credit strategy funds at the best possible value,” he added.