After IL&FS crisis shook the markets and the consequent liquidity crunch, the funding market froze, and the industry looked at the RBI as their saviour. The RBI’s refusal to do so coupled with its sparring with the government added to the woes of the market. Even after this fiasco, it looks like mutual funds have not learnt any lessons and are not so diligent in their lending practices. This was brought to light recently in an article in Bloomberg which unearthed information of two mutual funds lending to promoters of Yes Bank without solid collaterals in place.
Yes Bank stock’s woes
Yes Bank stock has been on a downward spiral ever since the RBI refused to extend the tenure of bank’s MD & CEO Rana Kapoor beyond 31 Jan 2019. Since mid-September, when the RBI asked Kapoor to leave the bank as CEO, Yes Bank stock has lost more than 55% of its value. This southward fall was further fuelled by global rating agency Moody’s downgrading of Yes Bank’s rating on November 27 to Ba1 from Baa3, and it also revised the outlook to negative, citing leadership transition and governance issues as credit negative. The stock has lost 13.59% in just two days following the action by Moody’s, and it closed at Rs 162.1 on Nov 28.
In Moody’s opinion, “although the bank’s reported credit fundamentals remain stable, the developments surrounding the transition in leadership as well as the governance issues are credit negative because they complicate management’s effective implementation of the bank’s long-term strategy.” Furthermore, these developments could constrain the bank’s ability to raise new capital and hence its growth prospects. Meanwhile, three members of the board including the chairman have resigned giving no concrete reasons and a member of the search committee has also resigned citing conflict of interest issues.
Mutual fund exposure to Yes Bank
Coming to the mutual fund industry exposure to Yes Bank, most equity funds have been prudent and have cut their exposure to the stock in the recent months. As on Oct 31 2018, only five mutual funds have a large exposure to Yes Bank stock. They are HDFC Mutual Fund (Rs 392 crore), Franklin Templeton Mutual Fund (Rs 621 crore), SBI Mutual Fund (Rs 504 crore), UTI Mutual Fund (Rs 634 crore) and Kotak Mahindra Mutual Fund (Rs 159 crore).
Debt fund exposure to Yes Bank and promoter entities
The picture changes when we look at debt mutual funds. The industry has lent around Rs 10,200 crore to Yes Bank and another Rs 1,900 crore to Morgan Credits Pvt Ltd and Yes Capital India Pvt Ltd, the promoter entities of Rana Kapoor family.
As for the bank, around Rs 6,000 crore are in CDs which will mature in the near term and have no credit risk as of now. Of the remaining Rs 4,200 crore, Reliance Mutual Fund has the highest exposure at Rs 2,335 crore. This is in addition to the Rs 1,200 crore Reliance MF has lent to the promoter vehicle Morgan Credit.
UTI MF and Franklin Templeton hold Rs 950 crore and Rs 570 crore of Yes Bank’s debt. Franklin Templeton has also lent Rs 680 crore to Yes Capital India Pvt Ltd, Kapoor’s family entity.
The loans to the promoter entities have been given against the lien of promoter shares with a promise that the borrowed amount plus accrued interest will always be less than half of the market value of their holdings in Yes Bank.
The trouble is after about 60% decline in the share price of Yes Bank, there are concerns among the mutual funds if they have to book mark-to-market losses.
Reliance MF exposure to Morgan Credit
|Reliance MF schemes||Rating||Rating Agency||Market Value (In Crs.)||% Of Net Asset||Maturity Date|
|Reliance Credit Risk Fund – Growth||A-||CARE||104.6665||0.9892||19-Apr-21|
|Reliance Credit Risk Fund – Growth||A-||CARE||61.6876||0.583||13-Jul-21|
|Reliance Equity Hybrid Fund – Growth||A-||CARE||575.6658||4.415||19-Apr-21|
|Reliance Equity Savings Fund – Reg – Growth||A-||CARE||78.4999||3.3427||19-Apr-21|
|Reliance Equity Savings Fund – Reg – Growth||A-||CARE||25.7032||1.0945||13-Jul-21|
|Reliance Ultra Short Duration Fund – Growth||A-||CARE||235.4996||5.6388||19-Apr-21|
|Reliance Ultra Short Duration Fund – Growth||A-||CARE||128.5158||3.0772||13-Jul-21|
Franklin MF exposure to Yes Capital
|Franklin Templeton schemes||Instrument Name||Rating||Rating Agency||Market Value (In Crs.)||% Of Net Asset||Maturity Date|
|Franklin India Credit Risk Fund – Growth||ZCB||AA||CARE||37.85||0.5402||12-Oct-20|
|Franklin India Dynamic Accrual Fund – Growth||ZCB||AA||CARE||40.56||1.1149||12-Oct-20|
|Franklin India Low Duration Fund – Growth||ZCB||AA||CARE||146.55||2.2562||12-Oct-20|
|Franklin India STIP – Growth||ZCB||AA||CARE||259.57||2.2583||12-Oct-20|
|Franklin India Ultra Short Bond Fund – Super IP – Growth||ZCB||AA||CARE||196.84||1.3442||12-Oct-20|
In a positive development, the entities belonging to Kapoor’s family have dished out Rs 400 crore to make up for the collateral short fall for the loan accounts held in both Reliance MF and Franklin Templeton MF.
But that may not be the end of the problem. Because, a new covenant was reportedly inserted to circumvent the infusion of new funds in the future. As per this, the debt limit will still hold, and now it would be busted only when the debt and accrued interest exceed half of Morgan Credit’s 3.04 percent plus the 4.33 percent Kapoor owns in his own name, according to the Bloomberg report.
All told, mutual funds are lending money to promoter entities without necessary collateral, while they take comfort from high credit ratings. In reality, these loans are unsecured and have little or no liquidity when things go south.
We feel that the fund houses should make sufficient disclosures to the investors in case of such transactions so that investors are in the loop and know what they are investing into.