Despite the ₹50,000 crores particular liquidity window introduced on Monday, banks could stay wary of lending to debt mutual funds, business executives stated, worsening the liquidity issues of the sector which has been dealing with heavy redemption stress.
In the backdrop of COVID-19 devastating the financial system, funds fear that the disaster is deepening, with banks unwilling to lend to anybody with out a high credit standing. Risk aversion soared with the collapse of Infrastructure Leasing & Financial Services in 2018, and since then, circumstances have solely worsened.
“What debt markets are dealing with at present is lack of danger urge for food out there and never a liquidity concern. There is ample liquidity within the system. However, due to the uncertainty across the impression of COVID-19 on the financial system and sustainability of companies, there’s danger aversion amongst traders,” stated Ashwani Bhatia, managing director and chief govt of SBI Mutual Fund
Bhatia is frightened that good high-quality non-AAA papers should not discover any takers both, as everybody is anxious in regard to the impression of the COVID-19 disaster on these companies and their capability to repay debt. “As the important thing concern within the debt market at present is the shortage of danger urge for food, regulatory help within the non-AAA phase would assist the market. Similar to the focused long-term repo operations (TLTROs) introduced by the Reserve Bank of India (RBI) for funding grade papers, there’s additionally a necessity for a particular motion on the non-AAA phase. Unless banks should not be incentivised for investing in apart from funding grade papers, the present concern may maintain for an extended interval of time,” Bhatia harassed.
Arvind Chari, head, fastened revenue and options at Quantum Advisors, is skeptical. He thinks the liquidity window by way of banks is probably not efficient in resolving the issue as banks are unwilling to take any credit score publicity on their books. “We have seen this in case of TLTROs through which banks weren’t prepared to purchase something aside from just a few high rated company bonds and with the imposition of issuer-wise limits, they only stayed away,” he stated.
According to Kaustubh Belapurkar, director, supervisor analysis, Morningstar India, liquidity is constrained within the debt markets, particularly decrease down the credit score spectrum. Debt funds have witnessed redemptions, however, most have a big quantity of liquid securities to meet redemptions. “This has been in play since March, given the pessimism across the financial system slowing down due to the lockdown,” he said. To be sure, outflows from liquid funds were at ₹110,037 crores in March, against ₹43,825 crores in February, in accordance with the information supplied by the Association of Mutual Funds in India (Amfi).
Nilesh Shah, the chairman, Amfi, stated, “Barring 4 fund homes who’ve collectively taken mortgage of ₹4,427.68 crores as on 23 April, which is a small share of the RBI announcement and likewise general MF business belongings below administration, none of the opposite 40 mutual fund homes have any borrowings, thereby indicating sound liquidity,” Shah assured.