SLF-MF(Special Liquidity Facility for Mutual Funds)
Special Liquidity Facility for Mutual Funds was an unusual window announced by the Reserve Bank of India for ensuring liquidity support to mutual funds. RBI announced the Special Liquidity Facility for Mutual Funds (SLF-MF) on April 27,2020 in an effort to restore confidence of public and investors on mutual fund scheme in the back ground of decision taken by Franklin Templeton to wind up six of its debt mutual fund schemes. RBI announced liquidity support of up to Rs. 50,000 crore under SLF-MF.
SLF-MF window is the fourth liquidity injection measure announced by RBI in a short span of time, the other three being Long Term Repo Operation (LTRO) and Targeted Long Term Repo Operations, TLTRO 1.0 and TLTRO 2.0.
How does Special Liquidity Facility for Mutual Funds (SLF-MF) work?
SLF-MF window is announced for two weeks during which RBI will lend money to banks at repo rate for 90 days. Banks can use the amount borrowed under SLF-MF window only for supporting liquidity requirements of mutual funds. Banks are given freedom to decide the method of support. They can extend liquidity either by purchasing certain debt instruments held by MFs or lending to MFs against the collateral of debt instruments. The purchased debt instrument shall be investment-grade corporate bonds, commercial paper, debentures or certificate of deposits.
What are the benefits offered to banks under Special Liquidity Facility for Mutual Funds (SLF-MF)?
• RBI will offer funds to the tune of Rs. 50,000 Cr under SLF-MF
• Banks can categorise the amount borrowed and deployed under SLF-MF as part of their Held To Maturity portfolio.
• Loans by banks to MFs under SLF-MF will not be considered as part of their capital market exposure or Adjusted Non-Bank Food Credit. The latter is used to measure bank’s achievement of priority lending targets.
Why is Special Liquidity Facility for Mutual Funds (SLF-MF) important?
Winding up of six debt mutual fund schemes by Franklin Templeton created a panic in markets and among investors. It was feared that the action could lead to a financial contagion, if investors chose for panic driven redemptions. Present regulation permits borrowing by MFs up to 20% of their Asset Under Management (AUM) for meeting liquidity shortages. Franklin Templeton though had borrowed, was unable to sell debt securities below AAA to raise funds to meet redemption pressures.
Through the announcement of SLF-MF scheme, RBI expressed the willingness to buy bonds, though indirectly, and that it is ready to support mutual funds to meet their liquidity requirements. However, banks were permitted to deal with investment grade bonds only. The steps by RBI eased the redemption pressure on mutual funds.
Special Liquidity Facility for Mutual Funds (SLF-MF) and investors
Many investors were channelizing their savings and surpluses to debt mutual funds consequent to the falling interest rates of deposits and small saving schemes. Some of the debt MF schemes have been investing in higher risk bearing instruments for better returns. Higher return offering instruments carry higher credit risk and default risk. Investors must learn that uncertainty and unprecedented circumstances warrant extreme caution and that preservation of capital should be the prime concern during such periods rather than maximization of returns.
The announcement of SLF-MF, proved the commitment of RBI to step in and resolve any systemic issues. The gesture was indeed a confidence inspiring measure. It may however, be noted that TLTRO 1.0 was announced to facilitate banks to borrow from RBI and to invest in investment grade corporate bonds, commercial paper, and non-convertible debentures. Many of the banks with risk appetite for investments had responded to this announcement and they may not be keen to borrow again and invest in debt instruments as envisaged under SLF-MF.
