RBI Announces INR 50,000 Cr Liquidity Facility for Mutual FundsThe announcement comes after Franklin Templeton mess, however RBI assured that the liquidity stress is confined to the high-risk debt MF segment and that the larger industry remains liquid

The Reserve Bank of India (RBI) on Monday announced INR 50,000 crore special liquidity facility for mutual funds to boost investor's confidence shaken by closing down of six Franklin Templeton debt funds.

The central bank acknowledged that certain funds are facing liquidity pressures. "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 there from," the central bank stated.

However, it noted that the stress is confined to the high-risk debt mutual fund segment for now and that the larger industry remains liquid.

"The RBI has stated that it remains vigilant and will take whatever steps are 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 INR 50,000 crore."

This facility is will provided to MF houses through banks. Between 27 April and 11 May, banks can borrow the funds from RBI at the current repo rate of 4.4 per cent and use them to either lend to MF houses or purchase investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.

Under the special facility, the RBI also noted a few points for banks:

• Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF).
• 支持extended to MFs under the facility will be exempted from banks' capital market exposure limits.
• Liquidity support availed under this facility would be eligible to be classified as "held to maturity' (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio.
• The value of securities acquired under the facility will not be reckoned for computation of adjusted nonfood bank credit (ANBC).

里沙,椅子man of Association of Mutual Funds in India (AMFI), welcomed the move calling it a good confidence building measure. "We are thankful to RBI and SEBI who have worked over the weekend to announce these confidence building measures."

At the same time, Shah assured that the MF industry continues to be on sound footing both on portfolio quality as also on liquidity. "Barring four fund houses who have collectively taken loan of INR 4,427.68 crore, as on 23 April, 2020, which is a small percentage of the RBI announcement and also overall MF industry AUMs, none of the other 40 mutual fund houses have any borrowings, thereby indicating sound liquidity," he explained.