RBI Special Liquidity Facility for MFs: How will it work? Will it help Franklin AMC?

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: April 27, 2020 at 6:23 pm

Last Updated on April 27, 2020 at 6:23 pm

Here is how the special liquidity facility announced by RBI for mutual funds will work.

RBI Special Liquidity Facility for MFs (SLF-MF): Working

The RBI today announced ₹ 50,000 crores Special Liquidity Facility for Mutual Funds (SLF-MF). This means that if an any AMC is facing excessive redemptions and do not wish to (or cannot) sell portfolio securities, they can approach the bank to avail a loan under SLF-MF.

The bank would first get the funds at a special (lower) rate from RBI between April 27, 2020, till May 11, 2020, or until exhaustion of the funds. Then they would offer it as a loan to interested AMCs.

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AMCs will have to offers as collateral investment-grade corporate bonds, commercial papers, debentures or certificates of Deposit they are currently holding. According to SEBI rules, each fund can borrow up to 20% of AUM for 6 months. There is no relaxation of this limit.

While AMCs would have a usual borrowing agreement with banks, they could now borrow at a lower rate under SLF-MF.

Will SLF-MF help Franklin AMC?

Since they have already closed six debt mutual funds, they do not need this loan facility for those schemes. Since they have partially written down fund of funds investing in the closed schemes, they may utilize it for redemptions from those or other open schemes.

Even if they use SLF-MF for the payout from the closed-schemes, the banks may either not accept the low-rated bonds as collateral or charge a higher rate. It would be best if investors affected by the scheme closure not assume that SLF-MF would help them unless there is a specific circular from Franklin.