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Suresh P Iyengar Ravaged by the latest YES Bank default and subsequent downgrade by ICRA Ratings, mutual funds are running for cover and creating segregated portfolios of all the schemes that have debt exposure to the troubled bank.
Highest exposure
Nippon India Mutual Fund, which has the highest exposure of ₹2,483 crore, has created segregated portfolios in six different schemes. The fund house has removed the daily subscription limit of ₹2 lakh per scheme per investor introduced earlier in all the six troubled schemes: Nippon India Strategic Debt Fund, Credit Risk Fund, Hybrid Bond Fund, Equity Hybrid Fund, Equity Savings Fund, and Retirement Fund – Wealth Creation.
With an investment of ₹50 crore, UTI MF has segregated its portfolio in three of its schemes while PGIM India MF, a part of the UK-headquartered Prudential Financial Inc, has spun-off its ₹14-crore investment separately till the time of the recovery.
Franklin Templeton, which had an exposure of ₹294 crore to YES Bank debt, has created segregated portfolios in four of its schemes.
These fund houses have created segregated portfolio despite the RBI announcing a draft reconstruction scheme for the troubled bank, saying all investments in instruments qualifying as Additional Tier-1 Capital, issued by YES Bank under the Basel III framework, shall stand written down permanently.
Credit crisis in bonds
Pankaj Pathak, Fund Manager, Fixed Income, Quantum Mutual Fund, said analysts and financial advisors have recommended allocating money to credit risk strategies, given the fall in yields of bonds of the government and AAA-rated companies. However, he said the credit crisis in the bond markets is not over despite the RBI’s actions, and the crisis in the NBFC, telecom and now the banking sector are an extension of the same. Debt fund investors need to be extra cautious while choosing funds and should prefer safety and liquidity over returns in this environment.
Allowing mutual funds to create segregated portfolios, despite their investments being written-off, has created a non-performing asset culture, said a mutual fund investor. However, the CEO of a mutual fund said there is no harm in creating segregated portfolios as the money, if and when recovered, can be returned to investors.
According to ICRA Ratings, YES Bank has raised ₹25,600 crore through a series of Basel compliant bonds.
The Basel II Upper Tier II Bonds and Basel II Tier I Bonds have specific features wherein the debt servicing is linked to the bank meeting the regulatory norms on capitalisation and profitability.
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