debt funds: Amid India’s debt fund distress, veteran calls for GenNext reforms


Ever since Franklin Templeton Mutual Fund dropped the bombshell by announcing shutdown of six credit fund schemes, which led to the freezing of Rs 30,000 crore investors’ money, India’s mutual fund industry has gone on the defensive, claiming it to be an isolated case.

But one industry veteran has stood out to call for reforms to guard against such fiasco.

Navneet Munot, who heads the investment team at SBI Mutual Fund, India’s largest fund house, says this incident should be a wake-up call for the authorities to usher in reforms.

“Credit markets witnessed an unprecedented event when a $3 billion bond portfolio was left wanting liquidity in a $3 trillion economy,” Munot said in a note.

Franklin Templeton had cited dearth of liquidity and shortage of investment opportunity for its action.

“This should be our moment to bring about next generation financial system reforms,” he said.

Munot specifically listed deepening of the corporate bond market and securitization market, channelling of patient capital through the AIF route and creating lenders of last resort as top measures in his wish list.

Franklin Templeton froze nearly Rs 31,000 crore worth of assets last month, most of which is invested in ‘at risk’ sectors, i.e., those facing financial problems such as NBFCs, power and realty.

Munot also called for a stronger banking system, where lenders are not pro-cyclical. “We need a strong institutional framework to facilitate access to capital across the credit spectrum when the cycle is at its worst, and its need to sustain the economy is the highest,” he said.

“If access to formal capital stays blocked, there is a risk of return to informal money lenders, which in turn can reverse the gains of formalisation,” warned the fund manager, who oversees Rs 3.5 lakh crore worth of equity assets.

Despite Reserve Bank of India’s proactive stance and opening credit lines for NBFCs, banks have been reluctant to lend to them for the fear of defaults. As funding dries up, there is fear that defaults may become an even bigger reality. Rating agency CRISIL in an assessment said of the total rated debt across sectors, over 16 per cent lies in the high-risk grid.

RBI “has only met with partial success in achieving the desired outcomes. The big disconnect between macro and micro level liquidity stays. The yield curve has continued to steepen, and corporate spreads stay elevated. Muted growth and high nominal rates can lead to debt ratios spiraling out of control. The tepid response to TLTRO 2.0 suggests lack of risk appetite and, therefore, the real economy stays starved for funds,” Munot said.

He called for the government to provide first loss guarantee and further relaxation in prudential norms. RBI should cap absorption through the reverse repo window along with aggressive OMOs to help with transmission, Munot said.

The top CIO claimed SBI Mutual Fund was not affected by the crisis in the debt market thanks to its conservative and prudent credit assessment. “Given the growth-inflation-external account dynamic, we stay long duration,” he said.

The rally in the equity market last month despite the challenging economic backdrop may lead to further bouts of volatility, the market veteran said.

“The world will change meaningfully post this crisis and the next few decades will be very different from the past few. Consumer behaviour will be materially altered. Businesses will have to keep reinventing themselves. Evaluating businesses on size- large caps versus small caps- may become less relevant as agility and nimbleness become the key success traits,” Munot said.

He said the evolving trend will also be a test for his firms’ ESG commitments.


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