RBI steps in to check MF contagion risk

The regulator of banks – Reserve Bank of India (RBI) today stepped up its efforts by announcing Rs 50,000 crore Special Liquidity Facility for Mutual Funds (SLF-MF) to rein in uncertainty.
Recent wind down of six debt fund schemes by Franklin Templeton led to the redemption pressure. Further, the heightened volatility in capital markets following the COVID-19 amid fears of the redemption pressures related to closure of some debt schemes, the MF industry looked set to experience a potential contagious effect.

The stress on MFs is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid.

Remaining vigilant to COVID-19 economic impact and preserve financial stability, the RBI has initiated necessary steps to address the concerns.
With a view to easing liquidity pressures on MFs, RBI decided to open the SLF-MF, through which it will conduct repo operations of 90 days tenor at the fixed repo rate. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays). The scheme is available from today i.e., April 27, 2020 till May 11, 2020 or up to utilization of the allocated amount, whichever is earlier.
RBI will review the timeline and amount, depending upon market conditions.

Meanwhile, the funds availed under the SLF-MF are required to be used by banks exclusively for meeting the liquidity requirements of MFs by extending loans, and undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.

Liquidity support availed under the SLF-MF would be eligible to be classified as held to maturity (HTM) even in excess of 25% of total investment permitted to be included in the HTM portfolio. Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF).

The face value of securities acquired under the SLF-MF and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets. Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.
It appears RBI managed to shot down to birds in one arrow, while it looks to calm down investor nerve post winding down of certain MF schemes, it opened up a new business avenue for banks.

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