UK Sinha, chairman, UTI AMC
The freeze on liquidity in the local market and the severe downturn in the stock market have hit Indian fund houses which are now seeing a drop in assets under management. It’s been a difficult few weeks for the mutual fund (MF) industry, given the pressure on redemptions in some of the fixed-maturity plans (FMPs) by large corporate investors. Some of the problems faced by the industry are now expected to be addressed by a special group constituted by the finance ministry to assess the current situation and to suggest measures. UK Sinha, chairman, UTI Asset Management Company (AMC) has been co-opted as a member of this group. He spoke to ET on the state of the industry and the changes he foresees. Excerpts:
How severe is the redemption pressure being faced by mutual funds in their debt schemes, mainly FMPs and liquid money market schemes?
If you look at the redemption figures in FMPs and liquid schemes last month and compared it with the numbers for the same period last year, you will see that there is not much difference. Earlier, after the September 15 deadline for advance tax, the liquidity in the system used to improve.
This time, the liquidity situation has worsened. The equity market is seeing one of its worst downtrends, there are rumours about the health of some financial institutions, and there are doubts if some mutual funds will be able to meet redemption demands. Banks have been drawing Rs 80-90,000 crore through RBI’s repo window. Even if they (banks) have surplus fund, risk aversion is very high, and they are very wary of lending. At the moment, the situation, as regards mutual funds, is manageable. The industry has seen a rapid growth in assets under management over the past 2-3 years, primarily on the back of liquid schemes and FMPs. Contrary to what most industry experts may claim, growth in equity assets has not been very high. The 35% CAGR (compounded annual growth) in AUM has largely been on the strength of debt schemes.
How valid are the concerns relating to quality of assets in liquid schemes and FMPs of MFs?
In the case of a vast majority of fund houses, 90% of the debt assets are in the highest-rated paper (debt instruments). Some fund houses have been trying to grow their AUM at any cost. These players have compromised on the quality of their assets in a bid to offer higher returns to their investors. Yet, these are minuscule, when seen in the context of the overall industry. The problem can be solved, if these funds are offered liquidity against their top quality assets. This is something that has to be tackled by authorities. Right now, it is not business as usual. The inter-bank money market has not been functional for close to two weeks.
Confidence among market participants is so low that there are no buyers for quality assets, and no institution is willing to offer credit against these assets. This is a peculiar situation. Faster the government and RBI act to address the situation, better the chances of restoration of normalcy not just in the money market, but in the financial system as a whole. This is not just an issue for MFs, but also for banks, NBFCs, and non-banks.
What more should RBI and the government do besides the recent steps taken to ease liquidity?
The government itself can inject liquidity into the system; it can provide credit to the non-banking industry as well. RBI could think of further reduction in CRR and SLR. At the moment, oil and fertiliser bonds do not qualify as securities for meeting SLR requirements. This norm could be changed. Coming back to mutual funds, at least 90% of the assets in debt schemes are in highest-rated paper. RBI should ensure that these papers remain liquid, by offering credit against them.
The freeze on liquidity in the local market and the severe downturn in the stock market have hit Indian fund houses which are now seeing a drop in assets under management. It’s been a difficult few weeks for the mutual fund (MF) industry, given the pressure on redemptions in some of the fixed-maturity plans (FMPs) by large corporate investors. Some of the problems faced by the industry are now expected to be addressed by a special group constituted by the finance ministry to assess the current situation and to suggest measures. UK Sinha, chairman, UTI Asset Management Company (AMC) has been co-opted as a member of this group. He spoke to ET on the state of the industry and the changes he foresees. Excerpts:
How severe is the redemption pressure being faced by mutual funds in their debt schemes, mainly FMPs and liquid money market schemes?
If you look at the redemption figures in FMPs and liquid schemes last month and compared it with the numbers for the same period last year, you will see that there is not much difference. Earlier, after the September 15 deadline for advance tax, the liquidity in the system used to improve.
This time, the liquidity situation has worsened. The equity market is seeing one of its worst downtrends, there are rumours about the health of some financial institutions, and there are doubts if some mutual funds will be able to meet redemption demands. Banks have been drawing Rs 80-90,000 crore through RBI’s repo window. Even if they (banks) have surplus fund, risk aversion is very high, and they are very wary of lending. At the moment, the situation, as regards mutual funds, is manageable. The industry has seen a rapid growth in assets under management over the past 2-3 years, primarily on the back of liquid schemes and FMPs. Contrary to what most industry experts may claim, growth in equity assets has not been very high. The 35% CAGR (compounded annual growth) in AUM has largely been on the strength of debt schemes.
How valid are the concerns relating to quality of assets in liquid schemes and FMPs of MFs?
In the case of a vast majority of fund houses, 90% of the debt assets are in the highest-rated paper (debt instruments). Some fund houses have been trying to grow their AUM at any cost. These players have compromised on the quality of their assets in a bid to offer higher returns to their investors. Yet, these are minuscule, when seen in the context of the overall industry. The problem can be solved, if these funds are offered liquidity against their top quality assets. This is something that has to be tackled by authorities. Right now, it is not business as usual. The inter-bank money market has not been functional for close to two weeks.
Confidence among market participants is so low that there are no buyers for quality assets, and no institution is willing to offer credit against these assets. This is a peculiar situation. Faster the government and RBI act to address the situation, better the chances of restoration of normalcy not just in the money market, but in the financial system as a whole. This is not just an issue for MFs, but also for banks, NBFCs, and non-banks.
What more should RBI and the government do besides the recent steps taken to ease liquidity?
The government itself can inject liquidity into the system; it can provide credit to the non-banking industry as well. RBI could think of further reduction in CRR and SLR. At the moment, oil and fertiliser bonds do not qualify as securities for meeting SLR requirements. This norm could be changed. Coming back to mutual funds, at least 90% of the assets in debt schemes are in highest-rated paper. RBI should ensure that these papers remain liquid, by offering credit against them.
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