With the Reserve Bank of India (RBI) having eased the rules, banks may step up support to cash-strapped mutual funds facing redemptions. On Thursday, the RBI said banks would be eligible for regulatory benefits irrespective of whether they supported MFs with resources from the special window or otherwise.
Lender are sitting on huge surpluses and have been parking them with the central bank’s reverse repo window; on Wednesday, they parked nearly Rs 7.5 lakh crore with the RBI. Thus far, banks have borrowed Rs 6,000 crore, in three days, from the special liquidity window. While the facility is open till May 11, banks might be encouraged to lend to MFs from funds already with them rather than borrow from the central bank at 4.4%.
Ashutosh Khajuria, ED and CFO, Federal Bank, pointed out the effective rate in the market is 3.75% or the reverse repo rate. “Why would anybody borrow from the RBI at 4.4% when there is so much liquidity? The real sweetener is that a regulatory relief has now been extended to all lending to MFs,” Khajuria said.
The new rules make non-RBI window exposure to MFs eligible to be classified in the held to maturity (HTM) portfolio, over and above the 25% of total investment which is permitted to be included in the HTM portfolio. The exposures will not be reckoned under the Large Exposure Framework (LEF) and there will be some relief on calculation of priority-sector limits and capital market exposure limits, the RBI said.
Banks believe it may be more viable to lend to MFs against securities held by them rather than buying the securities given the quality of the paper is not always satisfactory. Kamal Mahajan, head of treasury and global markets, Bank of Baroda, told FE that some of the bonds with MFs are unsecured or even illiquid because of their longer tenures. “Banks might go in for a combination of extending credit limits to MFs and buying bonds. At this stage, everybody is cautious because it is unclear how the disruption to the economy will impact different companies,” Mahajan said, adding the situation might improve in the next six to seven days once the sanctions for fresh credit limits were in place.
Source:- financialexpress.com