Domestic mutual fund houses last week borrowed from companies and a few banks at 13-14 per cent to meet the huge redemption pressure in the debt segment. Matters were exacerbated by the liquidity squeeze over the past one-and-a-half-weeks, which sent short-term rates through the roof.
“The liquidity situation has worsened over the last 7-10 days and banks have redeemed a big portion of their investment lying in liquid assets with the fund industry,” said the chief investment officer with a large fund house.
Most fund houses were forced to borrow from companies, as most banks scrambled for funds while overnight rates shot to beyond 12 per cent. But a few large banks found an opportunity to make money through arbitrage.
These banks borrowed funds under Reserve Bank of India’s liquidity adjustment facility to lend to some mutual funds. They charged between 11 and 14 per cent for up to five-day money, which they borrowed from RBI’s repo window at 6 per cent. These banks lent mostly to large mutual fund players.
| REPO REWARD |
| * MFs turned to companies, as banks felt the squeeze with call rates above 12% |
| * But some banks borrowed from RBI’s repo window at 6% and lent to MFs at up to 14% |
| * Funds parked by banks & FIs with MFs are estimated to have slid from Rs 50k cr to Rs 20k cr |
According to Association of Mutual Funds in India data, banks and other financial institutions had parked Rs 50,409 crore with fund houses in the non-equity segment as of September 30. “Banks have redeemed their funds to a large extent. Current assets from banks may not be more than Rs 20,000 crore, or even less,” said the CEO of a mid-sized fund house, which has a majority of schemes on the fixed-income side.
While some players said it was a temporary phase and that the situation would normalise shortly after money from the Coal India offering starts being refunded to investors from Monday, others were not so sure.
Bankers said the liquidity situation is expected to improve, but would stay tight for the next few months as several companies have lined up fund-raising plans in the busy season. There will be additional pressure from year-end investment liquidation by foreign Institutional Investors and payment of the third tranche of advance tax in mid-December.
Also, the government has lined up big-ticket public issuances over the next few months, including Shipping Corporation of India, Hindustan Copper Ltd, Manganese Ore India and Power Grid Corporation.
With contributions from Chandan Kishore Kant & Mehul Shah
