The daily average trading volume of commercial papers (CP) has fallen to less than 1 per cent of the outstanding amount, and just about 1 per cent of the holding of debt mutual funds, posing a serious challenge to the liquidity profile of these mutual funds, India Ratings has warned.
The total outstanding of commercial papers is close to Rs 4.3 trillion, while the average trading volume is now at less than Rs 4,000 crore. Non-bank financial companies (NBFC) and housing finance companies (HFC) are the major issuers of commercial papers.
Generally, the daily volume is Rs 10-15,000 crore in CPs in the secondary market.
“The daily CP trades in the secondary markets is less than 1 per cent of the total outstanding amount and around 1 per cent of the total exposure of debt mutual funds in CPs,” India Ratings and Research said in a note.
They are not as active in these markets as before as investors are also shying away from buying these papers both in the primary and the secondary market. On the other hand, papers issued by All India Financial Institutions, such as Nabard, Sidbi etc are not getting traded in secondary markets too, as buyers are not willing to part with these papers in uncertain times.
Hence, their share of volume in the secondary markets has also collapsed.
While the banking system liquidity has been aplenty, the market liquidity conditions “have been on tenterhooks,” noted India Ratings analyst Abhishek More.
Markets are preferring only a few entities with low risk perception in both primary and secondary markets, and the availability of liquidity for NBFCs and HFCs has been on a low, “due to elevated perception risk largely to do with the lack of confidence on specific entities or over the sector as a whole.”
This elevated risk perception, even as largely perpetuated by mutual funds, would be detrimental for these funds itself “as some of the rated schemes have significant exposures to the NBFC/HFC sector,” India Ratings noted.
A diminished secondary market activity should be a major worry for open-ended debt mutual funds, and can be credit negative for the mutual fund industry.
“Due to redemption pressure, fund managers may be forced to sell the best quality investments and this may leave the portfolio with relatively illiquid and weaker quality assets,” India Ratings said.
While the debt schemes rated by India Ratings have maintained adequate credit quality commensurate with their rating levels, some of their assets under management (AUMs) are witnessing sharp reductions due to redemptions, it noted. The rating agency said it considers liquidity and diversification of investments as critically as credit quality and duration of the underlying risk for rating purposes.
“Ind-Ra understands that weak liquidity and significant investor redemptions may increase risks in the scheme portfolio by way of increasing concentration over entities and sectors,” it said, adding it is currently reviewing the portfolio in terms of the credit quality of the underlying investments as well as diversification to manage concentration risks and may take rating actions on the mutual fund schemes that are holding securities in high concentration on a sustained basis.