With a view to easing liquidity pressures on Mutual Funds, the Reserve Bank of India (RBI) on April 27th, 2020 has been decided to open a special liquidity facility for mutual funds (SLF-MF) of Rs 50,000 crore. The RBI shall conduct repo operations of 90 days tenor at the fixed repo rate.
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 the closure of some debt MFs and potential contagious effects therefrom.
The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid.
The RBI reiterated that it “remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability.”
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 scheme is available from April 27th, 2020, till May 11th, 2020, or up to utilization of the allocated amount, whichever is earlier. The RBI will review the timeline and amount, depending upon market conditions.
“Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by (1) extending loans, and (2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs,” the RBI said in a statement.
Liquidity support availed under the SLF-MF 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.
Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). 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.
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