Mumbai: DUSSERA demand and government bond auctions could deepen the cash crunch this week unless the Centre and the RBI step in. And while banks have cut lending, mutual funds are trying to figure out who they could turn to if investors pull out big money.
Amid tight liquidity, mutual funds think that, like banks, if they are allowed to access overnight funds from the RBI, it would be easier for them to meet sudden redemption pressures. Fund houses, which discussed the possibility among themselves, have also met one RBI deputy governor recently to appraise the central bank about the situation.
“Liquidity is tight, but there is no run. If we can do repo deals with RBI or even raise money through repo transactions with banks and financial institutions, it could open a liquidity avenue,” said the CEO of a fund house. Repo, or repurchase of securities, is like a borrowing window from the RBI that banks and bond houses turn to for meeting their overnight and short-term money needs. MFs don’t have access to RBI repo, but a few have started drawing the credit lines with banks.
Though MFs have faced redemption in liquid and fixed maturity plans, the situation is not dire. “As market is choppy and overnight rates are high, MFs will take a hit if they are to borrow at prevailing rates to meet withdrawals,” said a bond trader.
For some fund houses, what has made things even more difficult is the bag of illiquid securities they had bought to generate a higher return for investors. Money market sources confirmed that a large fund promoted by an Indian group has asked other group companies to buy out such securities for which there are no takers. In all likelihood, such an in-house bailout could look like a normal transaction where the group’s insurance arm buys the dud securities.
Liquidity situation unlikely to improve
These are securities issued by real estate companies, few of which have cash to pay back once the bonds mature. Sources said in some cases, there have been forced rollovers of such bonds where real estate companies were about to default. The bag of illiquid papers which MFs are holding also comprises securities issued by finance companies, besides securitised papers or ‘pass through certificates’ (PTCs) issued by banks against loans they had given.
Last week, three pools of PTCs where the underlyings are commercial vehicle and personal loans were downgraded by rating agency. Many MFs, which had bought these PTCs issued by banks palming off their loans, may now find it difficult to offload the papers.
Most mutual funds have credit lines with banks, which allow them to borrow a maximum of 20% of the assets under management. These are one-day loans that fund houses take to meet the redemption pressure. But given the tight money situation, some banks are reluctant to give the full lines, and even if they do, the fund house will have to take a loss if securities have to be sold at distress to repay the bank. And the liquidity situation is unlikely to improve this week given the cash demand for Dussera and the Rs 17,000-crore auction of government securities. But chances are that things may start looking up post mid-October once oil bonds are issued—which can then be sold to RBI to generate cash—and the government starts spending.
