MF exposure to NBFCs jumps 30% in six months

Mutual funds’ exposure to non-banking finance companies (NBFCs) has shot up 25-35% in certain categories over the last six months.

While the move could help fetch higher yields, it could also adversely impact the funds’ liquidity and credit risk, suggest some.

The exposure of liquid and ultra short term schemes to NBFCs increased from Rs29,303 crore in June 2011 to Rs37,991 crore as of end-December, translating into a jump of 29.64% in six months, Sarthi Advisors, boutique financial services company, noted in a report dated January 16.

The main concern is related to asset-liability mismatch, wherein the asset financing loans are for 2-3 years to some of the riskier sectors while the borrowing is on short-term basis from mutual funds, said Deepak Sharma, CEO, Sarthi Advisors.

“This creates a kind of credit risk and liquidity risk for mutual fund schemes having high exposure to asset funding NBFCs.”
Dhirendra Kumar, CEO of Value Research, said that while the low tenure of the paper minimised chance of default, risk should be diversified.

“These funds are managed so that they comply with liquidity requirements and the average maturity of commercial papers held is only around 40 days. It’s not a great situation if a certain fund does take large exposure to some NBFC’s papers. It’s in the interest of investors that risk be diversified.”

According to the Sarthi report, liquid and ultra short term funds added Rs8,688 crore in NBFC paper, even as the size of these funds fell by Rs44,285 crore, over the six-month period.

Liquid funds’ exposure to NBFC paper rose 35%, or by Rs4,927 crore, while their assets under management fell by Rs34,468 crore. The exposure of ultra short term funds rose 25%, or by Rs3,762 crore, even as the assets under management reduced by Rs9,817 crore.

These papers formed the majority of the portfolio for a number of schemes.

Kotak Floater -ST had an 87.8% exposure to NBFCs as of December 2011. Tata Money Market, DWS Cash Opportunities, Daiwa Treasury Advantage and Religare UST all had more than 50% exposure to NBFC debt paper.

Certain schemes also had a significant exposure to a single entity —
Kotak Floater - ST had a 43.2% exposure to Indiabulls Financial Services; Principal Near-Term Fund had a 26.7% exposure to HSBC InvestDirect India; and the Daiwa Treasury Advantage fund had over 20% exposure to Religare Finvest and Edelweiss Financial Services.

Lakshmi Iyer, head (fixed income and products) at Kotak Mahindra Asset Management Co, said the increase was not wholly intentional. Instruments issued by banks are more liquid than commercial paper, which means they were sold first to meet redemption pressure, she said, adding, this caused the proportion of the latter to increase as assets came down.

Iyer conceded, however, that the leverage on NBFC balance sheets is much lower than in 2008 and hence they do not mind taking exposure if the spreads warrant the same.

Killol Pandya, head - fixed income at Daiwa Mutual Fund said their NBFC exposure was at 33%. The investments are in issuers that enjoy the highest rating and meet in-house rigorous credit quality norms, he said.

A spokesperson for Principal Mutual Fund said the portfolio is a reflection of the fund’s view on opportunities in commercial paper, on liquidity and interest rates.

Murthy Nagarajan, head - fixed income, Tata Asset Management, said the portfolio has good quality NBFC papers whose promoters are banks and large corporate houses, whose strong balance sheet and parentage provide comfort to investors.

Sujoy Das, head of fixed income at Religare Mutual Fund said the higher exposure was a result of better performance of NBFCs compared with those of banks.

A Deutsche Asset Management India spokesperson was not immediately available for comment.