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MFs on a volcano; using short-term funds for long-term lending

This article was posted on Apr 1, 2009 and is filed under Press Releases

MUMBAI: Mutual funds industry is sitting on a volcano as 75-80 per cent of its assets are short-term while it resorts to long-term lending to corporates, creating an asset-liability mismatch. “This is a dangerous situation,” warns UTI MF’s Chairman, U K Sinha, highlighting the need to take corrective measures.

Flagging-off the issue, Sinha, however, makes it clear that it was not a crisis situation warranting panic but it was time the regulators looked at the issue.

“I have brought it to the notice of the concerned authorities that it has systemic risks,” Sinha told reporters when asked if he had taken up the matter with the Government and regulators.

Of the 75-80 per cent of mutual fund assets which are short-term, Sinha said a substantial investment came from banks. Banking money with mutual funds in end-October was Rs 13,000-crore and it jumped up to Rs 90,000-crore by February, he said.

Though banks have long-term money, they are not lending but mutual funds which have banks’ short-term money parked with them are lending long-term to corporates.

“This is not a healthy trend,” he said, adding this could lead to an asset-liability or maturity mismatch, that too, when banks can withdraw money parked with mutual funds within 24 hours.

In the interest of the long-term health of the mutual funds industry, Sinha said that this practice should be discontinued.

He feared this was happening in the industry because of “competitive pressures” as a result of which mutual fund players “were throwing caution to the wind.”

The solution to the problem lay in self-control by trustees and mutual fund players themselves.

One of the main reasons for this, he said, was the tax benefit being provided to corporates investing in debt funds.

“This tax advantage (to corporates) is a distortion and does not serve any public policy,” he said.

Sinha said he was not against tax benefits to retail investors but extending it to corporates was proving detrimental to the mutual funds industry.

Suggesting there should be greater transparency and disclosure norms, Sinha said mutual funds should be made to declare on a daily or weekly basis, the banking money parked with them.

Most mutual funds were now suffering losses because they were running on short-term assets.

There are three types of mutual funds–public sector, those with foreign parentage and domestic private institutions, Sinha said.

Public sector mutual fund players have the potential to fare well but those with foreign parentage, who were very strong earlier, could now be in trouble because of the prevailing global economic slowdown, he said.

Domestic private players too were facing problems, he said.

source: Economictimes

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