India’s ailing credit market shows limits of central bankers

Bloomberg

Indian money managers are dumping corporate bonds as they struggle to meet redemptions after the biggest-ever forced closure of funds in the country last month.
Even higher-rated debt is under pressure. Notes issued by government-backed lenders Punjab National Bank, Andhra Bank and Canara Bank were traded in the past few days at the highest yields in over a year of at least 12.5%, data published on National Stock Exchange website show. Mutual funds struggling with redemptions were among the sellers, people familiar with the matter said.
The Reserve Bank of India took steps to inject more liquidity into the fund industry through bank loans after Franklin Templeton shocked markets by shutting six debt funds last month. But lenders have held back as they grapple with rising bad debt amid the coronavirus pandemic and world’s biggest lockdown. They’ve borrowed only about 5% of an RBI emergency funding line meant to encourage lending to mutual funds. That’s left asset managers with little recourse but to liquidate holdings.
“It is better to cut less liquid securities first when expecting further redemptions,” said Mahendra Jajoo, chief investment officer for fixed income at Mirae Asset Investment Managers India Pvt. “That is why we see that mutual funds are selling illiquid assets even at sharply higher yields.”
Such fire sales of corporate debt by mutual funds are a troubling sign in India, where money managers have played an increasingly important role for riskier borrowers in recent years.
So-called credit risk funds hold at least 65% of their total assets in company debt graded below the highest rating. The funds had helped keep cash flowing to such borrowers even as banks suffering from soured loans and shadow lenders reeling from an industry crisis retreated. But now that lifeline is in jeopardy.
Investor redemptions from the credit risk funds have slowed in the past few days, but still total about 141 billion rupees since April 27, according to Association of Mutual Funds in India.
That’s the day when the RBI offered as much as $6.6 billion to banks for them to lend to mutual funds. The step was meant to get more liquidity to money managers after Franklin Templeton’s fund closures, but lenders have so far borrowed only 24 billion rupees from the special window.
“Corporates in India will be starved of finance,” Shilan Shah, India economist at Capital Economics wrote in a note. “These financing constraints will compound the economy’s weakness and hamper the recovery once the lockdown is ended.”