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RBI to make TLTRO more effective

RBI to make TLTRO more effective

The RBI is expected to take steps in order to make the Targeted Long Term Repo Operations (TLTRO) more effective so it solves the liquidity crisis of NBFCs. The RBI Governor Shaktikanta Das said that it promises the representatives of NBFCs sector and microfinance sectors that they are working on strengthening the mechanism of TLTRO.


The meeting and discussions:

As per the statement given by RBI, the meeting was held with the representatives of NBFCs and micro financial institutions to discuss the issues regarding unavailability of liquidity from the banks and the extension of loan moratorium. In the meeting, it was requested to shift the loan moratorium period from March-to-May and April-to-June since the repayments from the customers are already collected for the month of March.


The suggestions given by Sa-dhan:

Sa-dhan, the micro lenders association suggested that there should be a direct lending given by the RBI to small and medium financial institutions to sustain the liquidity crisis faced by them. It has also requested for a relaxation in the norms relating to asset classifications for the next 3 months i.e. up to 30th September 2020.

The representatives of NBFC sector for the meeting were Ramesh Iyer, the chairman and TT Srinivasaraghavan, the director of Finance Industry Development Council (FIDC). The chairman Manoj Nambiar and CEO Harsh Shrivastava, the co chairperson K Paul Thomas and executive director P Satish of Sa-dhan attended the meeting as the representatives for the microfinance sector.


TLTRO can inject liquidity for smaller NBFCs:

Some of the industrial leaders said that TLTRO, which has been created by the RBI to solve the problem of illiquidity cannot be accessed by the smaller firms. RBI said that the banks can borrow and invest at least 50% of it in securities issued by microfinance sectors and NBFCs.

The first auction of Rs 25,000 crores had bid just above 50% because the banks were not willing to invest in smaller firms. The RBI identified the reason for such uninterested response and is taking necessary steps to solve it.


Problems of NBFCs & MFIs:

P Satish said to the media that NBFCs and MFIs have started operations on Monday and many of them are finding it difficult to have funds for salary payments and other operational expenses. Nearly 24% of the NBFCs have only received the payment from lenders in the lock down period. If the moratorium is not extended by the SIDBI, Mudra and SBI, it would cause a huge problem since they have a vast exposure to small and medium-sized MFIs.



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Mutual fund industry in crisis due to pandemic

Mutual fund industry in crisis due to pandemic

The COVID-19 pandemic has hit nearly all sectors of businesses, people, economy, trade and the financial system worldwide. Mutual fund industry  has been adversely affected due to corona virus. All mutual fund investors have incurred huge losses in NAVs, specially those investing into categories of equity related mutual fund schemes.

Nearly 20 categories of mutual funds viz. energy funds, International funds, banking funds, large cap funds, mid cap funds, dividend yield funds, PSU funds, infrastructure funds, etc. are some of the mutual fund schemes that have faced losses tremendously in the last month. The energy sector saw a downfall of 20.08% in the last month. It was followed by the International funds category which dipped to 20.07%. The banking sector funds also had a downfall not only because of the corona virus threat but also because of the non performing assets crisis. The gold funds category is the only sector which has given positive returns in the last month.


Winding of 6 mutual fund schemes by Franklin Templeton:

Franklin Templeton, the leading global investment management company announced the winding up of 6 mutual fund schemes on 23rd April, 2020. 

Fear of Investors:

All these issues have led to fear in the minds of investors making them pull out Rs. 9,000 crores out of the credit risk mutual fund schemes. As per the data collected by Pulse Labs, the asset under management of these mutual funds have dropped by 19%.

A lot of tension can be seen in the credit risk fund category because of the redemption and unavailability of liquid underlying assets. The HDFC credit risk fund has the highest loss in comparison with other credit risk funds. The asset under management of the credit risk funds show the tremendous depth in comparison to the last month.

Lakshmi Iyer, chief investment officer of debt, Kotak Mutual Funds said to the media that without even considering the quality of the portfolio, investors have started redeeming the money from the funds. One of the ICICI Prudential spokesperson said to the media that the company assures the portfolio is well differentiated on the asset side and liability side.


RBI’s help:

RBI has recently announced rupees 50,000 crore special liquidity funds for Mutual Funds. This was announced after the winding up of 6 mutual fund schemes by Franklin Templeton. It is a measure taken by RBI to calm down the investors and reduce their panic by providing a guarantee of having adequate liquidity to meet the redemption. These funds can be borrowed by the companies from banks at a repo rate of 4.4% for 90 days. The Targeted Long Term Repo Operations is to help several financial services companies to manage their cash flow problems amid COVID-19 outbreak.



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RBI introduces Operation Twist

RBI bond introduces Operation Twist


The Reserve Bank of India (RBI) came up with a bond-swapping programme and coined it as Operation Twist. RBI had announced that it would conduct a synchronous buying and selling option under the Open market operations (OMO). So, an OMO of ₹10,000 Crores each was held on 27 April, 2020. The RBI mentioned that the 10,000 Crores amount will be made up of purchase of long term securities having tenure of 6 to10 years.

The sale amount of 10,000 Crores will be made up by selling short term securities having maturity dates like June 2020, October 2020 and April 2021. Short term further having two categories of cash management bills, one of 77 days and another of 84 days and two treasury bills of 182 and 364 days respectively. These short term bills are being put on sale by the RBI keeping in mind the interim cash mismatches the government is facing recently due to economic difficulties the pandemic has produced.

Auction result reveals that the cut-off yields on which the RBI bought securities was much higher than secondary market.

To illustrate:

1) 7.26% Government security (G-sec) 2029 which had secondary market return of 6.38% was bought at 6.4%.

2) 7.59% G-sec 2026 was bought at 5.9% versus the secondary market that gave 5.8%.

Under this programme, the aggregate amount of Face Value (FV) notified by RBI was 10,000 crores, against which the participants offered a total amount of 64,746 crores . RBI received bids that were six times more than the FV of the bonds. On the other hand, bids received for the sale of securities were nearly five times than the offer, which amounted to nearly ₹50,260 Crores. The near term paper was giving lower yield than normal. The Operation Twist further aggravated the same.


When and why does the Central Bank conduct an OMO?

Generally, the OMO sales are undertaken when the RBI wants to take out excess liquidity from the system. Whereas, OMO purchases are done to infuse instant money into the market. Recently, RBI was seen carrying out these operations to balance the sovereign yield curve. Particularly, ensuring lower returns at the shorter end of the curve.

Referring to the auction results, Naveen Singh, senior VP, ICICI Securities Primary Dealership says since RBI could buy securities at higher percentages, this believably implies that the banks are interested to book profit on the stock.

The Stocks which were held previously for maturity were made available for sale. Inversely, the cut-off rates on the sale of near-term paper was lower than prevailing market rates. For example, the 364-day T- bill was auctioned at 3.9%, when the market rate stood 4.074%. Distinctly, the RBI is desirous to lower the interest rates at the shorter end. This move is taken to enable an economic comeback against the upset which the pandemic has produced.



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SEBI and RBI review situation after Franklin fiasco

SEBI, RBI review situation after Franklin fiasco

The RBI and SEBI look to determine the damage from Franklin Templeton’s decision. After their decision to close six debt funds, RBI and SEBI look to contain the fallout from this decision. Franklin Templeton’s decision has raised concerns that investors will withdraw from similar categories across the industry.

RBI’s take on Franklin Templeton’s decision:

The RBI may change rules to encourage banks to borrow more. Through the reverse repo window, RBI may limit the amount it absorbs from banks. The amount may be set at Rs. 2 lakh crore. With banks parking Rs 7 lakh crore from reverse repo, RBI believes there is enough liquidity. To deal with liquidity positions and redemption, RBI officials has communicated with fund managers and banks. One of the proposals was to goad banks to purchase bonds of firms that are investment category. The bonds should not be triple-A rated.

SEBI seeks details from mutual funds:

SEBI also needs information from mutual funds regarding liquidity position and extent of redemption from their debt schemes portfolio. Based on current portfolios, SEBI wants to determine whether mutual funds can handle huge redemption. They also want to know the position of mutual funds regarding debt fund liquidity and days required to liquidate holdings. Debt mutual funds capital is estimated at Rs. 12 lakh crore approximately. According to estimations, Franklin Templeton froze about Rs. 55,000 crore of this credit funds.

Mutual funds approach:

To contain the fallout, mutual funds have also sought help from finance ministry and Niti Aayog for measures. RBI believes there is enough liquidity for fund houses and it is only a matter of channelizing it. However, Fund houses desire to have a separate lending window. The reverse repo rate has already been cut down to 3.75%.

On April 24, mutual funds sold a few top-rated securities assuming the pressure of redemption in the coming days. In the bond market, risk aversion led to yields higher than normal by 20-30 points on April 24.

A few of the large mutual funds persuaded SEBI to boost the borrowing limit. This increase is sought due to the COVID-19 pandemic causing financial markets to freeze as there are sharp outflows. These outflows are from different debt products.

Franklin Templeton stop redemptions:

Following the massive outflows in the last 2 months, Franklin Templeton were compelled to stop redemption. Franklin Templeton has mostly low rated papers in the rest of the portfolio. They only have a select number of buyers in the current market. They have also drained the lending limits in these schemes with banks.

RBI’s inquiry:

RBI inquiry to the mutual find industry is to assess the loan amounts taken from banks. They also need information on the ‘lines of credit’ used by asset management companies and the ‘un drawn lines’. These details are required for March 31 and April 24. To meet the other payout and redemption demands, mutual funds are granted to borrow 20% of their capital from banks. If this limit is exhausted, a raise up to 40% is allowed by SEBI based on merit.

Majority of the mutual funds except Franklin Templeton has not even utilized the 20% limit after RBI pumped money. The money was injected through long-term repo operations (LTRO) in to the system in March.

As of April 23, the borrowings of four mutual funds including Franklin Templeton was Rs. 4,427 crore. On March 31, the assets under debt schemes of the mutual fund industry was Rs. 10.3 lakh crore. This figure is 16% less from the earlier month.



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