Franklin’s Stress Spurs RBI to Offer Funds $6.6 Billion of Loans
India RBI Extends 500 Billion Rupee Credit Line for Mutual Funds
(Bloomberg) -- India’s central bank opened a new credit facility for mutual funds to help money managers avoid distressed sales of assets and calm investor concerns after Franklin Templeton shut six of them last week citing a cash crunch.
The Reserve Bank of India will offer as much as 500 billion rupees ($6.6 billion) from Monday, which banks can borrow and then lend to mutual funds, or buy investment-grade debt held by the funds, it said in a statement. The program will end on May 11 or when the funds are utilized, whichever is earlier, it said.
The first such facility for fund managers in seven years highlights the crisis that’s spreading in the South Asian nation’s credit markets. The world’s biggest stay-at-home restrictions only worsened the woes of the industry that’s yet to recover from the collapse of an infrastructure financier in 2018. The turbulence intensified Thursday after Franklin Templeton shut six fixed-income and credit-risk funds run by its Indian unit, locking in 308 billion rupees of investor monies.
“This is one of the first solid steps taken by the central bank to provide relief to India’s mutual fund industry,” said Dhawal Dalal, chief investment officer for fixed income at Edelweiss Asset Management Ltd. “We hope banks will consider lending against AA and below rated bonds. If banks choose to lend only against corporate bonds rated AAA or AA+, then I believe this measure will not be fully utilized.”
That’s because higher-rated securities can be sold in the market, Dalal said. It’s the illiquid and junk bonds that are facing the problem. India’s banks, which are flush with liquidity, aren’t lending on concern the protracted demand slowdown because of the lockdown will lead to rising delinquencies. For instance, there were few takers for RBI’s offer for cheap cash to shadow lenders on Thursday.
The central bank shall conduct repo operations of 90 days tenor at the fixed repo rate to provide the liquidity to funds through banks, RBI said in the statement. The facility “is on-tap and open-ended, and banks can submit their bids to avail funding on any day,” according to the statement.
“Heightened volatility in capital markets in reaction to Covid-19 has imposed liquidity strains on mutual funds, which have intensified in the wake of redemption pressures related to closure of some debt MFs,” the central bank said in the statement. “The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid.”
Average yields on top-rated rupee corporate bonds maturing in three years fell 5-10 basis points on Monday, traders said, after the central bank announced the new credit facility. The benchmark stock index rose 1.3% on Monday in Mumbai while the rupee strengthened 0.3%.
The closure of the Templeton funds had sent corporate borrowing costs soaring last week, with the spread on one benchmark index rising to a seven-year high.
The debt plans of many local asset managers saw outflows in March gathering momentum even as new investments coming into them plunged, data compiled by Association of Mutual Funds in India shows.
Mutual funds are allowed to borrow as much as 20% of their assets to meet liquidity needs for redemption or dividend pay-out. Just four of the 44 asset managers had borrowed a total of 44 billion rupees as of April 23, according to Nilesh Shah, chairman of the association.
“The facility may or may not be utilized, but the fact that it is available will help calm nerves,” said G. Pradeepkumar, chief executive officer at Union Asset Management Co. “There has been some tightness in liquidity for the industry, particularly due to the lockdown.”
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