RBI’s liquidity support for MFs may struggle to be effective.

• The Reserve Bank of India’s (RBI’s) liquidity support for mutual funds could struggle to be effective, as its success would hang on banks’ appetite to take up the risks involved, amid a low capital headroom and a likely increase in fresh non-performing loans.
• The RBI’s Rs 50,000-crore Special Liquidity Facility for Mutual Funds (SLF-MF) will provide a 90-day repo funding to banks, to extend liquidity to — or purchase of commercial paper and debt securities from — local mutual funds.
• The size of the SLF-MF appears broadly commensurate with the scale of the funds most at risk.
• Credit Risk Funds” are most at risk if redemptions continue (their AUM declined by 10 per cent in March), particularly where funds have exposure to less liquid securities, such as unlisted securities, and/or have demonstrably higher risk appetite through exposure to defaulted entities such as IL&FS, Religare Finvest, and/or Dewan Housing.