NBFC: Mutual funds increase their exposure to NBFC portfolio assets

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Mutual funds recently increased their purchases of securitized debt from non-bank finance companies (NBFCs), which now sell less short-term commercial paper to raise funds after asset-liability mismatches and IL & FS defaults. last fall slowed down the flow of funds to the sector.

Compared with November, mutual fund purchases of NBFC securitized loans increased by more than 65% in February, with the industry’s collective exposure to these instruments set at Rs 95,294 crore.

Reliance Mutual Fund, Franklin Templeton and ICICI Prudential are among the asset managers who have reportedly increased their purchases of the papers, said three people with direct knowledge of the matter.

Reliance Mutual Fund and ICICI Prudential declined to comment. A query sent to Franklin Templeton went unanswered until the publication of this report.

NBFCs are increasingly raising funds through the sale of loan portfolios after IL & FS defaults exposed the industry’s asset-liability mismatches, limiting the industry’s access to funds. The mutual funds that buy these portfolios are issued Transfer Certificates (PTCs), which are backed by the corresponding retail asset pool.

“The PTCs held by asset management companies are largely sourced from NBFCs and microfinance institutions,” said Bhushan Kedar, director of mutual fund research,

. “The underlying assets in such cases are auto loans, home loans, construction equipment loans, microfinance loans and also rent receivables. The maturity profile of these securities in most cases is up to three years.

Three-year PTCs typically offer higher yields, around 1.10% to 1.6% more than similar certificates issued by good quality companies. The spread reaches 2.7% for instruments with a maturity of seven years, according to CRISIL data.

“Investment in PTCs by mutual funds has increased sharply in recent times and is an indication of mutual fund involvement in securitized assets,” Kedar said.

Securitization reached a record Rs 1.9 lakh crore in FY19, against Rs 85,000 crore in FY18.

“Structured credit is an interesting and attractive product because it offers the possibility of selling and distributing products to several market players, such as mutual funds or family offices,” said Ashok Wadhwa, CEO of the group. at Ambit Holdings. .

Of the total securitization in FY19, around 36% is PTC. The rest involves a direct assignment where the loans change hands. Since asset managers can only invest in securities and not directly in individual loans, the loan pool is grouped together as PTCs to qualify them as security.

“It will also help finance companies who can trade such PTCs in the secondary market,” said a fund manager at a large mutual fund company.

While the secondary market for PTCs has yet to recover, recent transactions should help increase volumes, dealers said.


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