On Thursday, Franklin Templeton India, one of the largest mutual funds in the country, announced it had ‘voluntarily decided to wind up their suite of six yield-oriented, managed credit funds, effective April 23, 2020’. Units of these funds cannot be redeemed till such time the fund can effect ‘orderly realisation and liquidation of underlying assets’.
Effectively savings worth over $ 4 billion or over Rs 30,000 crore stand demonetised. Sure enough by Friday, a pall of gloom followed and over the weekend middle class investors were caught in a panic. Fund houses have already seen a rush for redemption which could accelerate, come Monday.
And with good reason! Investors who are caught in one pandemic do not want to be trapped in another contagion. The fine print of the schemes, investors scarcely invest time on, permits the lockdown of funds. Then there is the reality the fund house has cited — of ‘severe market dislocation and illiquidity caused by the COVID-19 pandemic’ as a cause for the action.
And what is chilling is the eerie silence of the Sarkar on the abrupt freeze of the funds. Neither of the domain regulators, SEBI which regulates funds and RBI which oversees credit, found the shock worth their attention. Nor has anyone from the Ministry of Finance found it necessary to comment on the central cause of lack of liquidity in the markets, or explain/assure investors of the safety of their funds.
The silence of those tasked with ensuring systemic stability is ominous given the pre- COVID- morbidity, the history of inaction or inactive policies. Over Rs 1 lakh crore of public money is stranded in the unresolved IL&FS crash. It is also pertinent to record that over Rs 90,000 crore is stuck in a quagmire following the collapse of DHFL. And then, there is the confounding confusion over the rescue of private sector Yes Bank, which has left savers and investors immobile.
There is every possibility the virus could infect other debt funds —which account for over Rs 10 lakh crore or half of the mutual fund investments. A seductive theory abuzz in government and regulatory institutions attempts to suggest that the freezing of funds was the result of risky bets and not lack of liquidity. Managing risk is what market intermediaries do and the caveat emptor warning is about gain and pain not a freeze!
Fear has no bottom and is known to go viral. The fear of being stranded without access to hard-earned savings, that too amidst a pandemic threatening lives and livelihoods, is palpably real. Middle-class savers suffering from huge losses in the equity funds could rush to protect savings. The existing conditions make over Rs 24 lakh crore of savings vulnerable to a rash of redemptions.
To appreciate the magnitude of risks, map the lack of economic activity and the need for credit. With barely a third of the economy functioning, enterprises will need to borrow more. There is already an inexplicable policy asymmetry. Moratorium on payment is available to borrowers — on retail mortgages and insolvency process — but not for those who lend but cannot borrow. A run on funds will starve an already illiquid market. The much announced TLTRO (targeted longer-term refinancing operations) scheme is off the target. It is ironical that in an economy rated ‘BBB’ –banks prefer lending to the government and even AA or A+ debt has no takers!
It would be reasonable to expect that an episode of this kind would necessitate a response in words and in action. In 2008, in the wake of the global financial crisis, following stakeholder consultations by RBI and SEBI, a special window of credit for mutual funds was made available to prevent collapse. Last month, the US Federal Reserve expanded liquidity to allow for direct primary and secondary market support for corporates, for ‘fallen angels’ who lost investment grade rating following the lockdown. There is no wheel to be invented nor is the need to make liquidity available rocket science. A simple Ctrl C and Ctrl V could do for starters.
It is true that the RBI cannot do it alone. It is true that monetary instruments have limited efficacy. It is also a fact that as the banker to the nation and as the institution responsible for ‘securing monetary stability in India’, it falls on the RBI to advice the Government of India to do what is necessary — in terms of fiscal stimulus or expanding its balance sheet. Equally, the Ministry of Finance is obliged to consult and collaborate and act in concert. The principal agents of the economy can scarcely afford to be spectators in the face of a crisis.
The financial sector is the incubator of both growth and crises. The crisis in the savings sector unless urgently attended could engulf the broader political economy. What happens in the financial markets does not stay in the financial sector.