Mutual funds have borrowed about Rs 11,000 crore until Friday from banks through the special repo window to tide over the liquidity crisis, Association of Mutual Funds in India (Amfi) Chairman A P Kurian said.
However, according to the Reserve Bank of India (RBI) data, the outstanding amount under the special repo facility as on Friday was Rs 6,920 crore, of which Rs 1,310 crore was redeemed on Monday.
The rate at which banks lend to mutual funds was slashed drastically to 11 per cent from 14-18 per cent earlier in October.
On November 4, Kurian had urged the finance ministry to direct banks to lend to mutual funds at reasonable rates. Money was being lent at 14-16 per cent, which Kurian described as “unreasonable”.
Finance Minister P Chidambaram had met heads of state-owned banks on November 4 to review the half-yearly performance of banks and also discuss several other issues, including lending to mutual funds.
“I am in touch with the Indian Banks’ Association (IBA) every day to see that banks give credit. I wouldn’t say the crisis is over, but we are getting there,” Kurian said.
Liquidity crisis
“Because of the RBI measures, there was general improvement in the liquidity scenario and redemption pressure has come down. Banks were also increasingly lending,” Kurian said.
Last month, the central bank had announced a series of rate cuts to improve the liquidity situation of the entire banking system. RBI cut banks’ Cash Reserve Ratio (CRR) by 300 basis points (bps) to 5.5 per cent and slashed the repo rate by 150 bps to 7.5 per cent.
RBI had also announced a Rs 60,000 crore special mechanism — special 14-day repo for banks — on October 14, which indirectly provided mutual funds with liquidity support. Under this mechanism, banks can borrow money from RBI and lend it to mutual funds against their certificates of deposit (CDs).
On Saturday last, RBI said the special repo facility would continue until March.
Banks have a Statutory Liquidity Ratio (SLR)-exemption of 1.5 per cent of the net demand and time liabilities for them to borrow for this purpose through special repo auctions.
Mid-October to October-end was the most difficult time for the mutual fund industry in terms of managing the liquidity crisis, Kurian said.
In October, assets under management (AUM) of the entire mutual fund industry fell 18.33 per cent from September to Rs 394,700 crore, the Amfi data said.
Although the mutual fund industry is yet to tide over the crisis, Kurian was of the view that borrowings by fund houses were not significant.
“So far till Friday, only three-four fund houses have borrowed. Others who had borrowed have repaid,” Kurian said.
Regulatory action
“Amfi and the Securities and Exchange Board of India (Sebi) are discussing in the light of what is happening, what it is that we should do,” he said.
“Fixed Maturity Plan (FMP) is one category of funds we would like to revisit and make certain changes,” he said.
According to media reports, regulators are working on some structural changes in FMPs such as putting an exit clause, deciding on differential loads for retail and corporate clients, structural changes, etc, so that such a scenario does not emerge again.
The industry was even considering to revisit its business model so that more focus is on the retail base as any corporate withdrawals, as has been witnessed recently, don’t impact the fund houses again.
Kurian ruled out any major asset-liability mismatch for any fund house. “In certain schemes, there could have been some mismatch but for a short period of time,” he said. Recently, funds witnessed massive redemption in short-term debt funds.
Consolidation cues
When asked whether the current crisis would trigger any consolidation in industry, Kurian said it has started happening.
Recently, Lotus India Mutual Fund has been acquired by Religare AEGON Mutual Fund.
Among domestic players, DLF, India Infoline and India Bulls, and among foreign players, Nomura and Nicco are set to enter the industry. “These new asset management companies would bring dynamism to the sector,” Kurian said. So far, there are 37 mutual funds in the country, of which 35 are functional.
