RBI Announces Rs. 50,000 crore Special Liquidity Facility for Mutual Funds vide press release 2019-2020/2276 dated 27th April, 2020. In view of the situation arising due to the COVID-19 pandemic and extended lockdown period.
Why RBI Announced such Measure?
• Heightened volatility in capital markets
• Liquidity strains on mutual funds (MFs),
• Redemption pressures related to the closure of some debt MFs
• Potential contagious effects
• To mitigate the economic impact of COVID-19 and preserve financial stability
The scheme is available from today i.e., April 27, 2020 till May 11, 2020, or up to utilization of the allocated amount, whichever is earlier.
Key Highlights of the Scheme:
• With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of ` 50,000 crore
• Under the SLF-MF, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate
• Banks can submit their bids to avail of funding on any day from Monday to Friday (excluding holidays).
• The Reserve Bank will review the timeline and amount,depending upon market conditions.
• Liquidity support would be eligible to be classified as held to maturity (HTM) even in excess of 25% of total investment permitted to be included in the HTM portfolio.
Note: Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.
Utilization of Funds
Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by
(1) extending loans, and
(2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs
How to Avail Benefits:
• This special repo window will be available to all LAF eligible banks and can be availed only for on-lending to Mutual funds
• The eligible banks may place their bids electronically on the CBS platform between 9 AM and 12.00 Noon every day
• The bidding process, settlement and reversal of SLF-MF repo would be similar to the existing system being followed in case of LAF/MSF.
• In case of over-subscription of the notified amount on any given day, the allotment will be done on pro-rata basis.
• The minimum bid amount would be Rupees one crore and multiples thereof. The allotment would be in multiples of Rupees one crore.
• A market participant can place bids of amount less than or equal to the notified amount of the issue announced on a given day.
• The eligible collateral and the applicable haircuts will remain the same as applicable for LAF.
Note: While banks will decide the tenor of lending to /repo with mutual funds, the minimum tenor of repo with RBI will be for a period of three months.
Disclaimer: IN NO EVENT THE AUTHOR SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM OR ARISING OUT OF OR IN CONNECTION WITH THE USE OF THIS INFORMATION.
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