Reserve Bank of India announces Rs. 50,000 crore Special Liquidity Facility for Mutual Funds (SLF-MF)
The current COVID-19 pandemic situation has led to a very unique situation across the globe. In an effort to break the chain and practice social distancing, many countries including India have been on a lockdown.
The nationwide lockdown also implies reduced economic activity. On Monday, April 27, 2020, the Reserve Bank of India (RBI) stated that it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability. According to their latest notification, the capital markets in reaction to COVID-19 are experiencing heightened volatility and have imposed liquidity strains on mutual funds (MFs). The situation has intensified in the wake of redemption pressures related to closure of some debt mutual funds and potential contagious effects. The stress remains confined to the high-risk debt mutual fund segment leaving the larger industry liquid.
In order to ease the liquidity pressures on mutual funds, RBI has decided to open a Special Liquidity Facility (SLF) for mutual funds of Rs. 50,000 crores.
Following are the salient features of Special Liquidity Facility for Mutual Funds (SLF-MF):
1. The RBI shall conduct repo operations of 90 days tenor at the fixed repo rate.
2. The SLF-MF is on tap and open ended.
3. Banks can submit their bids to avail funding any day from Monday to Friday (excluding holidays).
4. The is applicable from April 27, 2020 to May 11, 2020.
5. Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of mutual funds by
a. Extending loans
b. 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.
6. Liquidity support availed under the scheme 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.
7. Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). The face value of securities acquired under the SLF-MF and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets.
8. Support extended to mutual funds under the SLF-MF shall be exempted from banks’ capital market exposure limits.
The Reserve Bank of India will review the timeline and amount depending upon market conditions.