New Delhi: The Reserve Bank of India (RBI) announced a special liquidity facility worth Rs 50,000 crore for Mutual Funds (MFs) on Monday. This move is aimed at easing liquidity pressures as well as boost investors' confidence days after Franklin Templeton, US-based company wound up six of its India funds. This is the first instance when a fund house is shutting its schemes because of the coronavirus-related situation.
The RBI said it was alert and would take all essential steps to ease the economic impact of the novel coronavirus and reserve financial constancy. The RBI said, "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 also added that the funds availed under the scheme will be used by banks completely for meeting the liquidity supplies of mutual funds by ranging 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 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 (April 27) till May 11 or up to utilisation of the allotted amount, whichever earlier, the RBI said, adding that it would review the timeline and amount.
The RBI statement said, "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."
Exposures under this flair will not be measured 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 announced.
"Franklin Templeton Mutual Fund's decision to wind up six debt schemes is a matter of grave concern to the investors, mutual fund industry and the financial markets," former finance minister P Chidambaram had said in a statement after the news broke.
"I recall that a similar situation arose in the first week of October 2008 (during the global financial crisis) when mutual funds faced liquidity stress. The government immediately consulted RBI, SEBI (Securities and Exchange Board of India), IBA (Indian Banks' Association), AMFI (Association of Mutual Funds in India) and others," the former finance minister said.
An urgent meeting of the Financial Stability and Development Council (FSDC) was convened, and a solution was found by the end of the day, he recalled
"On the next morning, officers of RBI and SEBI met at 8 am, and RBI announced a 14-day special repo facility and allowed an additional 0.5 per cent of NDTL. The situation was resolved," he said.