India tries to stomp out the Franklin fire

Mumbai: The capital markets regulator and RBI swung into action over the weekend to assess the damage and contain the fallout from Franklin Templeton’s decision to close six debt funds.To spur banks to lend more, the RBI may tweak rules limiting the amount it absorbs from banks through the reverse repo window at, say, Rs 2 lakh crore or set a different amount, said a person close to the talks. The RBI believes there is ample liquidity, with banks parking Rs 7 lakh crore with it via reverse repo, the person added.“RBI officials spoke with banks and fund managers during the weekend to figure out the preparedness to deal with redemptions, and the liquidity positions,” said one person aware of the discussions. “There is no liquidity issue for most funds. But one of the suggestions is to goad banks to lend, and buy bonds of firms that are investment-grade but not triple-A.”‘Credit funds’ form a small partThe Securities and Exchange Board of India (Sebi) also sought details from mutual funds on the extent of redemptions and the liquidity position of their debt schemes’ portfolio, said three persons in the know.Franklin Templeton’s decision to scrap the six debt schemes and put redemptions on hold indefinitely sparked widespread concerns that investors would withdraw from similar product categories across the industry. Sebi wants to know whether mutual funds would be in a position to handle probable mass redemptions based on their current portfolios.“The (market) regulator has asked if funds are facing huge redemptions, how liquid their debt fund portfolios are, and how many days it would take to liquidate the holdings,” said a senior industry official.Debt mutual funds’ corpus is estimated at about Rs 12 lakh crore with investments ranging from overnight funds to long-duration bond funds. Of this, the so-called credit funds — the family that Franklin Templeton froze — constitutes about Rs 55,000 crore, according to industry estimates.An emailed query to the Sebi spokesperson on the matter went unanswered.MFS APPROACH NITI, FINMINMutual funds are also said to have knocked on the doors of Niti Aayog and the finance ministry for measures to contain the fallout. “The problem in the mutual fund industry is restricted only to credit funds,” said the second person. “These constitute less than 5 per cent of the total amount with debt schemes. So it is not a big problem for the overall system as of now.”Fund houses are looking for a separate lending window, but the RBI believes there is sufficient liquidity and it is only a question of channelising it. “Already, the rate for reverse repo has been brought down to 3.75 per cent to make it unattractive for banks to park money with the RBI,” said a person. “That’s the first step, and the second could come soon.”On Friday, mutual funds shifted to cash by selling some top-rated debt securities in anticipation of redemption pressure over the next few days. The risk aversion in the bond market led to yields widening by 20-30 basis points on Friday, which was higher than normal. Franklin Templeton was forced to stop redemptions since it had run out of liquid papers following the huge outflows in the past two months.The rest of the securities in its portfolios are mostly lowly rated papers, which have few buyers in the current market. Industry officials said Franklin Templeton had also exhausted its borrowing limits with banks for these schemes.QUERY ON BORROWINGSRBI’s query to the mutual fund industry on its borrowings is to evaluate the amount of loans they have taken from banks. In a communication to compliance officers of mutual funds on Sunday morning, the Association of Mutual Funds of India (AMFI) said the RBI had sought details on the ‘lines of credit’ used by asset management companies and the ‘undrawn lines’ for March 31 and April 24.Emailed queries to the RBI and AMFI went unanswered. 75398016Mutual funds are allowed to borrow up to 20 per cent of their assets from banks for six months to meet redemption and other payout demands. If a fund house has exhausted this limit, Sebi allows it to raise up to 40 per cent based on merit.In February and March, a handful of large mutual funds approached Sebi to enhance the borrowing cap following sharp outflows from various debt products after the financial markets froze due to the Covid-19 pandemic.Industry officials said these mutual funds, barring Franklin Templeton, did not need to utilise the higher limits after the RBI pumped money into the system through long-term repo operations (LTRO) in March.“Majority of the funds have not utilised even the 20 per cent limit. So there is comfort for now,” said the chief executive of a large fund.Out of the 42 mutual funds, four — including Franklin Templeton — had borrowings of about Rs 4,427 crore as on April 23, according to an AMFI statement.The assets under mutual fund industry’s debt schemes were worth roughly Rs 10.3 lakh crore on March 31, down 16 per cent from the previous month.

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