MFs may get to rediscount bills

The Reserve Bank of India is considering a proposal to allow private sector mutual funds to do bill rediscounting to help tide over the illiquidity in the government securities markets.

According to officials with a private sector mutual fund, the illiquidity in the government securities market, which otherwise used to be the most liquid segment of the financial sector, has led to a liquidity crunch at the time of redemptions by corporate as well as retail clients.

They added that, even if it is a temporary phenomenon, the illiquidity creates panic among investors. Therefore, there should be an alternative avenue for mutual funds to generate revenue and bill discounting is such an option.

Bill rediscounting is done both in the overseas markets for exporters as well as for local suppliers in the domestic market. Exporters and local suppliers opt for this facility to enable speedy realisation of their bills.

Banks, at the behest of the supplier or exporter, pay them the money due at a discounted rate and in turn take on the responsibility of collecting the payments on the client's behalf. The discount rate is the premium the banks take for handling the responsibility.

On the same lines, the bank can also offload the responsibility to another party by paying the premium and accepting the receivables at a cut. This work can be done by the mutual funds as well.

In the last six months, most of the gilt funds managed by major mutual funds yielded a negative return of 0.15-1.67 per cent.

This is because the interest rate scenario has changed, with rates rising across the globe. Moreover, the inflation rate is rising on the back of rising oil and commodity prices.

In order to cope with the rising interest rates, most mutual funds are reducing the duration of their investment portfolio dominant in government securities to one year.

This is because both supply and demand in this segment is high. While one- and two-year papers are ample in supply with the starting of the market stabilisation scheme of the RBI, demand is rife from mutual funds and banks so that they can exit in a short time.