Debt mutual funds continue to pare exposure to NBFCs

Exposure of debt mutual funds towards non-banking financial companies in September stood at `1.8 lakh crore, down by nearly Rs 78,000 crore since July 2018, when the NBFC crisis began. Mutual funds invest in debt instruments of NBFCs, which include short-term instruments like commercial papers (CPs) and long-term debt papers like non-convertible debtentures (NCDs).

The latest report by Care Ratings on mutual funds said the percentage share of funds deployed by mutual funds in commercial papers of NBFCs in September was at 6.76%, lowest since July 2018. “After the liquidity crisis triggered in the NBFC space, MFs withdrew 41% of their investments from commercial papers of NBFCs,” according to Care Ratings. Data from the Securities and Exchange Board of India (Sebi) showed mutual funds had invested `1.57 lakh crore in CPs of NBFC in July last year.

Market participants believe while the top five names in the NBFC space continue to receive funds, the series of downgrades and defaults have hurt sentiments. Furthermore, mutual funds have had to cut exposure to fulfill the Sebi circular, which capped sector exposure limits at 20% as against the previous 25%. “While the top quality NBFC papers still garner interest, overall exposures have to be cut to fulfill the Sebi regulations on sectoral exposure limits which is now capped at 20%,” said Mahendra Jajoo, head-Fixed Income, Mirae Asset Global. Sebi also had capped debt mutual fund exposures towards housing finance companies (HFCs) at 10% from 15%.

Data from Sebi showed that mutual funds had an exposure of 6.98% towards the long-term debt instruments or corporate debt papers of NBFCs, which includes floating rate bonds and NCDs. MFs invested `95,099 crore towards these long-term instruments in September, lower by nearly 6% over the previous year.