The Reserve Bank of India has announced a 50000-crore rupee borrowing window for banks to lend to mutual funds. It is said that RBI is vigilant and handling the panic created after the Franklin Templeton funds closed abruptly. The question ponders: What is RBI actually offering?
The RBI has opened a special liquidity facility for mutual funds of 50000-crore rupees under this RBI is going to conduct repo operations for time period of 90 days at a fixed repo rate of 4.4%. This is a good deal for banks as these funds can be used by banks exclusively to meet the liquidity requirements of mutual funds on a short-term basis or banks can even buy bonds, other money market instruments like commercial paper, certificate of deposits which are held by mutual funds. As per RBI the schemes makes sense for banks as they can borrow at about 4.4% and lend to mutual funds at a margin of about 2-2.5%.
Also, this is not the first time RBI has helped the mutual fund industry. It also came forward during the 2008-09 crisis to save the sector, the central bank then opened a special window to provide banks with funds to support mutual funds. After that RBI, cut short the amount which is to be deposited with the central bank that is CRR and releasing over 12 billion dollars into the banking system, injected $13 billions via its overnight money market operations and also introduced temporary funding window.
The main question here is: Will this time, window will help mutual funds? The answer is that certainly depends on how much funds bank borrow and lend to mutual funds. Under this liquidity support availed means, RBI one is eligible to be classified as held to maturity (HTM) even in excess of 25% of total investment permitted to be included in their HTM portfolio. This means banks do not have to fear about the losses on this portfolio. And banks do not have to worry about additional priority sector burden since the funds borrowed will not be reckoned under the computation of priority sector targets.
The scheme is available from April 27, 2020 till 11 May, 2020 or up to the utilisation of allocated amount whichever is earlier. Franklin Templeton closing 6 debt funds schemes influenced the RBI to initiate the liquidity announcement which will ease pressure and help mutual funds to finance the repayment using the facility rather than selling instruments at a discount. This will help realise the significance of short-term investment and improve investor sentiment about the debt market.