Few days after the Reserve Bank of India (RBI) unveiled Rs 50,000 crore special liquidity facility for mutual funds (SLF-MF), credit rating agency, Fitch Ratings in its latest report has said that the RBI’s liquidity support for mutual funds may struggle to be effective, as its success will hang on banks' appetite to take up the risks involved, amid low capital headroom and a likely increase in fresh non-performing loans.
According to the report, the size of the SLF-MF appears broadly commensurate with the scale of the funds most at risk. It said that the official support measures announced for mutual funds in India may struggle to be effective, as undercapitalized banks are unlikely to be tempted to extend liquidity to the sector without capital relief on the facilities.
The rating agency is expecting funds classified as ‘Credit Risk Funds’ are most at risk if redemptions continue (their AUM declined by 10 percent in March), particularly where funds have exposure to less liquid securities, such as unlisted securities, and/or have demonstrably higher risk appetite through exposure to defaulted entities such as IL&FS, Religare Finvest, and/or Dewan Housing.