RBI announces special liquidity support worth Rs 50,000 crore to mutual funds
Under the special liquidity facility scheme for mutual funds, the RBI will conduct repo operations of 90 days tenor at a fixed repo rate.
The Reserve Bank of India announced a special liquidity facility for mutual funds worth Rs 50,000 crore on April 27, 2020. According to RBI, the heightened volatility in capital markets due to the COVID-19 pandemic has imposed liquidity strains on mutual funds (MFs).
The liquidity strains on mutual funds have only 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 mutual fund segment at this stage, while the larger industry remains liquid.
Hence, the RBI has decided to open a special liquidity facility for mutual funds worth ₹ 50,000 crore to ease the liquidity pressures on mutual funds.
The main objective behind the move is to preserve financial stability and mitigate the economic impact of COVID-19.
RBI’s special liquidity facility: Key Highlights
• Under the special liquidity facility scheme for mutual funds (SLF-MF), the RBI will conduct repo operations of 90 days tenor at a fixed repo rate.
• The scheme is on-tap and open-ended and the banks can submit their bids to avail funding on any day from Monday to Friday excluding the holidays.
• The scheme has been brought into effect starting from today, April 27 till May 11, 2020 or up to utilization of the allocated amount, whichever is earlier.
• The Reserve Bank will review amount and the timeline, depending upon market conditions.
• The Rs 50,000 crore worth funds made available under the special scheme will be used by the banks exclusively to meet the liquidity requirements of mutual funds by:
1. Extending loans
2. Undertaking outright purchase or repos against the collateral of investment-grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.
• The liquidity support availed under the SLF-MF scheme will 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.
• The exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). The face value of the securities acquired under the SLF-MF scheme and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) to determine priority sector targets/sub-targets.
• The support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.
• The special repo window will be available to all Liquidity Adjustment Facility(LAF) eligible banks against eligible collateral and can be availed only for on-lending to Mutual funds.
• The eligible banks can place their bids electronically on the CBS platform between 9 am-12 pm every day.
• A LAF Repo issue will be created every day for the amount remaining under the scheme.
• The bidding process, settlement and reversal of SLF-MF repo would be similar to the existing system being followed in the case of LAF/MSF.
• In case of over-subscription of the notified amount on any given day, the allotment will be done on a pro-rata basis.
• The RBI will, however, reserve the right to inject a marginally higher amount than the notified amount due to rounding effects.
• The minimum bid amount would be Rs one crore and multiples thereof and the allotment would be in multiples of Rs one crore.
• A market participant can place bids of an amount less than or equal to the notified amount of the issue announced on a given day. The RBI can reject participant bids if the total bid amount submitted by the participant exceeds the notified amount of the issue.
• The eligible collateral and the applicable haircuts will remain the same as applicable for LAF.
• All other terms and conditions as applicable to LAF operations, including a facility for security substitution in terms of extant guidelines dated April 12, 2017 will also be applicable to these special operations.
• While banks will decide the tenor of lending to /repo with mutual funds, the minimum tenor of repo with RBI will be for three months.