Santosh Kumar Mohapatra
In an extraordinary decision, one of country’s oldest asset management companies (AMC), the Franklin Templeton Mutual Fund, has decided to close six of its open-ended debt mutual funds schemes (otherwise known as fixed-income debt schemes) effective from April 23. Those six schemes include the Ultra Short Bond Fund, the India Short Term Income Fund, the India Credit Risk Fund, the India Low Duration Fund, the India Dynamic Accrual Fund and the India Income Opportunities Fund. As a result, these open-ended schemes that were available for buying or selling on a daily basis every working day will not be available now. On maturity, payment may be made. This will result in locking in of investors’ wealth worth Rs 30,800 crore.
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In other words, starting April 24, existing investors in the scheme are not able to withdraw their investments, make fresh purchases, do transfers to equity schemes or make systematic withdrawals. Middle-class Investors who are already battered by the fall in stock market are now caught in a panic situation. Franklin Templeton has explained that this is the only viable means to secure an orderly realization of portfolio assets and may protect value for investors. But the whole situation has created a trust-deficit for investors and exposed the failures of finance ministry, the RBI and the SEBI in tackling the situation arising from the Covid pandemic.
US-based Franklin Templeton has a history of over 25 years in India, and 33 per cent of its global workforce is based here. Franklin Templeton is the ninth largest mutual fund house in India and manages assets worth Rs 1.16 lakh crore. Franklin Templeton said that the intense slump in liquidity in the bond markets with concomitant large redemptions following the Covid-19 outbreak forced the fund house to make this unpleasant decision.
Of course, it tried to meet redemption pressures by way of getting borrowers to prepay debt, selling bonds to banks and using the credit line provided by banks, but failed.
In March alone, these funds cumulatively saw an estimated net outflow of Rs 9,148 crore. However, redemption pressure is not mounting only on Franklin Templeton but on other funds too. A month ago, mutual funds investing in debt papers saw outflows of close to Rs 1.95 lakh crore. The main reason is its investment in some financially volatile firms. Credit risk funds take additional risk to generate additional return and the current economic environment has led to defaults.
Debt mutual funds, even some liquid funds which are considered the safest, have in the recent past experienced tremendous volatility which was further exacerbated by the economic slowdown. Franklin Templeton AMC has had a history of high returns, by taking on higher risk in their debt portfolio. This strategy started to show fissures over the past 18 months with a sequence of defaults by a large infrastructure lender in late 2018 which led to a liquidity crunch in the corporate bond market. The collapse of Infrastructure Leasing and Financial Services Limited (IL&FS) and of the Dewan Housing Finance Corp Ltd (DHFL) are glaring examples.
The deplorable state of NBFCs has a deleterious impact on mutual fund industry, of which Franklin Templeton is a part. According to data from the Securities and Exchange Board of India (Sebi), MFs had a Rs 1.38 lakh crore debt exposure to NBFCs, of which Rs 51,014 crore was in less than 90-day debt papers, as of March 31 this year.
The shortage of liquidity is also attributed to unwillingness of banks to lend. Banks weren’t willing, as loans were turning in to NPAs. So banks parked their surplus cash with the RBI. RBI data reveals that banks parked nearly Rs 7.215 lakh crore each day with RBI at just 3.75 per cent interest (reverse repo rate under the liquidity adjustment facility) — up from an average of Rs 2.371 lakh crore towards the end of March and just about Rs 50,600 crore by the end of January this year, at a rate of 4.9 per cent. With no buyers for its securities and in the absence of market liquidity, Templeton was left with no choice but to wind up its schemes.
Now discussions are on as to what brunt will this have on the markets and the financial system. The mutual fund industry swung into a firefighting mode with the Association of Mutual Funds in India (AMFI) saying the issue is limited to six schemes of one fund house. It is argued that closing six schemes does not mean Franklin Templeton is shutting down. Even after these schemes are wound up, Templeton still has seven other debt funds in its stable, with combined assets under management of about Rs 17,800 crore as on April 22. These apart, the house has 15 equity funds worth Rs 36,663 crore and 11 hybrid category schemes with assets of Rs 3,143 crore as of March 31, as per Value Research data
However, the Rs 22 lakh crore mutual fund (MF) industry is in jeopardy now. It is feared that this can exacerbate redemption pressure, and lead to forced sales of relatively good-quality papers or trigger borrowing. Fund houses in India have already seen a rush for redemption and are battling to reassure investors and discouraging them from taking hurried decisions to redeem their investments.
A similar situation was seen when the US Federal Reserve and the US treasury department resorted to rescue operations during the subprime crisis in 2008-09. The treasury department commenced the Troubled Asset Recovery Plan (TARP) — buying of troubled assets at a discount from financial institutions. The US Fed started its Quantitative Easing (QE) policy, by buying assets and pushing the liquidity out. The European Central Bank (ECB) and the Bank of Japan (BoJ) too have done extensive QE programmes. The RBI has done similar bailouts in 2008 and 2013, when it averted a crisis in the debt market by creating a special window. The banks lent to debt funds and passed on assets as collateral and the RBI accepted those assets as collateral from the banks and lent them money which they rolled back into the debt funds. Meanwhile, RBI had announced a 14-day special repo facility and an additional 0.5 per cent of Net Demand and Time Liabilities (NDTL).
It is savings that lead to investment which spur growth. It is the savings- oriented sectors that provide capital for industry at cheaper rates through financial markets; and this is time for urgent steps to restore confidence of investors.
The writer is an Odisha-based economist.
