RBI aid puts mutual funds on recovery road

     Almost one month after the RBI stepped in to help the mutual fund industry out of its liquidity problems, it does appear that they are on the road to recovery, said mutual fund officials.

RBI had for the first time on October 14 introduced a 14-day liquidity window to provide credit to mutual funds in need. This measure has greatly helped the mutual fund industry, which is now returning to normalcy as redemption pressure has eased considerably and inflows have started to come in, said Mr A.P. Kurian, Chairman, Association of Mutual Funds in India.

The mutual fund industry has borrowed close to Rs 20,000 crore from RBI, out of which about Rs 9,000 crore has been paid back, said Mr Kurian.

While the borrowing was much less than the limits provided by RBI, the announcement of the measures was made at the most appropriate time. Else there was a possibility of three or four fund houses going bankrupt, said Mr U.K. Sinha, Chairman & Managing Director, UTI Asset Management Company.

The first liquidity measure, which was introduced on October 14, just four days ahead of the monetary policy, came as a complete surprise as far as its timing was concerned.
Woes of industry 



The problem of the mutual fund industry was a mix of liquidity crunch and credit aversion. While the liquidity issues have been dealt with, the credit aversion is easing off slowly, said Mr Ramkumar K., Head-Fixed Income, Sundaram BNP Paribas Mutual.

In October, redemption requests from corporates were unusually high because of the lack of confidence and the liquidity crunch, said Mr Sinha. With the money market having dried up and banks not trusting each other, corporates felt it safer to withdraw their cash from mutual funds and park it with themselves, Mr Sinha said.

In October, no institutions, including banks, were willing to buy any papers (CDs or CPs), said Mr Badrish Kulhalli, Senior Fund Manager-Debt, Principal Pnb Asset Management Company.

While banks were not willing to lend, RBI indicated to the banks and corporates that the Government would lend support to the mutual fund industry, which helped improve the scenario, said the mangers.

The response to RBI measure was lukewarm in the first phase. Continuous dialogue and easing off of higher interest rates helped improve the issue. While banks had agreed to lend to mutual funds, the cost of borrowing was high for the funds, who in most cases do not make much money on their liquid schemes, said Mr Waqar Naqvi, CEO of Taurus Mutual Fund.

RBI’s relief measures have helped the industry considerably, to the extent that earlier while CDs were being borrowed at interest rates as high as 13-14 per cent, they are now at 10 per cent, said Mr Ramkumar.

It would have helped mutual funds better if the tenure for the liquidity window was flexible as some mutual funds were reluctant to borrow on a 14-day lock-in period and would have preferred a lesser time span, said the head of a mutual fund house.

However, the problem will be permanently addressed only when the mutual funds’ sources of funds, namely the corporate houses and investors, start investing in the usual way, said Mr Naqvi.