Mumbai: Post demonetisation in December 2016 quarter, the debt mutual fund industry benefitted from the sharp rise in financial savings and the overall Mutual Fund (MF) industry rose by 50 per cent Y-o-Y at one point. However, since then the debt MF industry has observed repeated shocks from credit events that started with the IL&FS crisis in September 2018 followed by other corporate defaults. The recent wind up of six managed credit schemes by Franklin Templeton has actually originated from a liquidity crisis as per a report by Emkay Global Financial Services. The report highlights the major changes in debt fund investment strategies that impact many sectors.

One can blame the easy money availability through alternate intermediaries like mutual funds. This also meant that banks lost share to bond markets and corporates enjoyed better borrowing costs (with sometimes even AA-rated paper costing less than bank rates). “We could see a normalisation of this trend, with higher reliance on borrowings from banks (who have theoretically better underwriting capabilities than the bond market), with a consequent structural rise in borrowing costs. Top private corporates that borrow from MFs include those from telecom, oil and gas, power and mining sectors,” says an analyst at Emkay Global Financial Services.

That said, one particular category of private corporates especially Non-Banking Financial Companies (NBFCs) took a severe beating on their fortunes with too much reliance on debt funds. The overall NBFC borrowing from MF has fallen 17 per cent since the IL&FS crisis and within that sub-AAA rated paper falling 26 per cent.

“These trends could continue, with fewer large, reputed NBFCs being able to tap the bond markets, while the rest rely more on banks.This could impact the overall competitiveness of NBFCs against banks over the long term,” notes the report.