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Debt funds and their appetite for bank CDs

 

IT IS not a secret that cash-strapped banks have been resorted to heavy borrowings and debt funds have been the major buyers of their debt paper, called as certificates of deposit (CD). This trend continues going by the latest mutual funds' deployment data released by the Securities and Exchange Board of India (Sebi) recently, pertaining to March this year.

From the end of one financial year (FY10) to the next (FY11), debt fund schemes of domestic mutual funds have deployed a rising portion of funds available to deployed in bank CD in two out of three maturity buckets (based on tenure of debt paper). This has come at the cost of paring down of their exposure to money market instruments as well as to long-term debt to non-banking financial companies (NBFCs).

Interestingly though, in the shorter maturity bucket of zero to six months, the FCRB analysis also revealed one another debt paper, namely commercial papers by NBFCs, getting prominence. Bank CD completely dominated the deployment in the six to 12 months maturity bucket and this came at the cost of the debt funds' exposure to all commercial papers. This is not surprising as banks were the biggest borrowers.

There were more interesting shifts in debt fund managers' preferences in debt paper having maturity of one year and above. Collectively, they bought down their exposure to corporate debt paper issued by NBFCs and correspondingly increased exposure to corporate debt issued by non-NBFCs and non-realty companies, government securities and to securitised debt involving single sell down or single loan made to non-NBFC, non-realty companies.

Take for instance, the portfolio of Templeton India Income Opportunities Fund, among the five largest long-term debt funds with a corpus of Rs 4,177 crore on March 31 this year and Rs 1,720 crore on March 31, 2010.


Last March-end, it had 29.72 per cent of its corpus invested in corporate debt papers of nine NBFCs. At the end of March this year, it had just 14.50 per cent of its corpus invested in eight NBFCs' corporate debt papers. On the other hand, the share of its investments in pass-through certificates, which are securitised debt paper, to total corpus rose from 24 per cent to 41 per cent.

Long-term NBFC debt papers are illiquid and we can not sell them easily.

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