Franklin Templeton crisis: Cautious banks review credit lines for funds

Mumbai: The relationship between some high street banks and mutual funds will be tested with lenders closely monitoring ‘daylight’ overdraft facilityLines for mutual funds. Over the past few days, banks have been trying to assess liquidity hole their MF clients could face this week amid fears of an increase in redemptions subsequently Franklin TempletonDecision to close six debt schemes.

The overdraft facilities are bank-day loans from banks that help the MFs overflow temporary liquidity mismatches in the face of redemption pressures. The greater the redemption that a fund has to deal with, the higher the overdraft requirement in the event of a lack of fresh inflow from investors.

“There can be a huge demand for OD (coating) lines. The banks will have to take a call. Given the state of the state corporate bond market, banks are reluctant to let intraday loans become overnight or short-term loans. It is possible that a fund may not be able to sell securities in an illiquid market, and some of the intraday ODs (lines) may be able to turn loans overnight. Most banks do not prefer it. And even if a bank allows it, it wants to minimize the daily amount, ”a senior banker told ET.

Banks talking to fund houses

Lenders – some of whom are custodians for MFs – have been in contact with fund officials to estimate the expected mismatch between inflows and outflows on Monday.

In addition to custodian banks that own a fund’s securities and lend against these securities, non-custodian banks have also provided large OD lines to MFs to build relationships and bag business such as debt collection and cash management. “These are largely unsecured loans. The banks sanctioned large OD lines as asset managers are regulated entities. Banks can now become more cautious and selective, ”said another banker.

According to market sources, Franklin Templeton has to repay a loan it had taken from a large Mumbai-based public sector. It also has to pay over Rs 3,000 crore to counterparties in bond repo agreements – which are repurchase agreements (between a borrower and lender) to raise short-term money. When asked about these obligations, a fund house spokesman did not respond to ET requests.

One of the MNC banks has ‘reset’ the OD limits as part of an internal control mechanism. “This means that ODs will not be determined based on the maximum a bank can lend to a single borrower under regulatory guidelines. The release of the OD will depend on the inflow that an MF expects on Monday and beyond, ”said a source.

MF schemes can borrow up to 20% in the normal course – and up to 30% subject to regulatory approval – of the assets under management to meet the redemption requirement. Many funds typically lend at the end of March when redemption pressure builds up. Credit lines from banks allow funds to avoid selling well-rated bonds at lower valuations and pay back banks as new investors put money into April. OD demand is growing by the end of the quarter.

Some of the bankers and fund managers, ET spoke with, said the RBI can only penetrate if they sense there is a great tide of redemption. Even if the RBI opens a special window, it should be a scheme where MFs get long tenor loans from banks. That’s because we don’t know when the market will regain confidence and secondary trades are revived, ”said one industry. During the 2008 and 2013 financial crises, RBI had opened a special facility to make short-term funds available to banks for lending to MFs

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