RBI announces Rs 50,000 Cr special liquidity facility for mutual funds

The Reserve Bank of India on Monday provided a Rs 50,000-crore shot in the arm to stressed mutual funds by unveiling a special liquidity facility for the sector, days after Franklin Templeton Mutual Fund decided to close six debt schemes.

In a statement, the central bank said heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom.

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

The Reserve Bank of India (RBI) also stressed it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability.

Last time, the Reserve Bank of India (RBI) had opened a special borrowing window of Rs 25,000 crore for banks to help meet the cash requirements of mutual funds in July 2013.

Following the collapse of Lehman Brothers, the RBI, in October 2008, had provided a similar additional liquidity support exclusively for mutual fund industry.

Under the Special Liquidity Facility for Mutual Funds (SLF-MF), 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, the central bank said.

The scheme will be available from Monday itself till May 11, 2020, or up to utilisation of the allocated amount, whichever is earlier.

The Reserve Bank also said it will review the timeline and amount, depending upon market conditions.

The announcement comes days after Franklin Templeton Mutual Fund, which has been operating in India for 25 years, decided to shut down Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund.

The RBI further said funds availed under the SLF-MF should 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, debentures and certificates of deposit held by MFs.

In case of over-subscription of the notified amount on any given day, the central bank said the allotment will be done on pro-rata basis.

"RBI will, however, reserve the right to inject marginally higher amount than the notified amount due to rounding effects," it said.

The minimum bid amount would be Rs 1 crore and multiples thereof.

Assets under management (AUM) of the Indian MF industry as on March 31, 2020, stood at Rs 22,26,203 crore, as per the Association of Mutual Funds in India.

The total number of accounts (or folios as per mutual fund parlance) as on March 31, 2020, stood at 8.97 crore, while the number of folios under equity, hybrid and solution oriented schemes, wherein the maximum investment is from retail segment stood at 7.94 crore.

March 2020 was 70th consecutive month witnessing rise in the number of folios.