Four days after US-based Franklin Templeton closed its six credit fund schemes, the RBI has announced Rs 50,000 crore special liquidity facility for mutual funds amid heightened volatility in capital markets in reaction to COVID-19.
The central bank said liquidity strains on mutual funds had intensified in the wake of redemption pressures. "The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid," the apex bank clarified.
The RBI said it was vigilant and would take all steps where necessary to mitigate the economic impact of COVID-19 and preserve financial stability. "With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of Rs 50,000 crore," the RBI announced.
The funds availed under the scheme will be used by banks exclusively for meeting the liquidity requirements of mutual funds by extending loans and undertaking purchase of repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of deposit (CDs) held by MFs, the RBI said.
Under the special liquidity facility, the RBI 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 RBI said.
The scheme was available from today i.e., April 27, till May 11 or up to utilisation of the allocated amount, whichever earlier, the RBI said, adding that it would review the timeline and amount.
"The liquidity support availed under the scheme will be eligible to be classified as held to maturity even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio," the RBI statement said.
Exposures under this facility will not be considered under the Large Exposure Framework (LEF), said the RBI. "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," the RBI said.
A nightmare has come true for Franklin Templeton debt funds investors after the fund manager wound up six debt schemes. Investors who put their hard-earned money in supposedly safe debt funds now do not know what'll happen to their investments. To soothe fears of investors, the RBI and markets regulator SEBI had assessed the overall situation triggered by Franklin Templeton's decision during the weekend.
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