The Advisory Committee of SEBI on Wednesday proposed that the exposure limits of liquid funds to non-banking finance companies (NBFCs) and housing finance companies (NBFCs) be reduced in a phased manner.
Banks’ refusal to lend has triggered a cash crunch at NBFCs, in turn raising concerns that they will struggle to repay liquid funds that have bought their debt papers.
Currently, liquid funds can have an aggregate 40% exposure to these lenders, including 25% to NBFCs and 15% to housing finance companies.
This move comes amid heightened investor concerns about liquid funds holding debt issued by troubled groups such as Infrastructure Leasing & Financial Services Ltd (IL&FS), Dewan Housing Finance Ltd and Essel Group. It is mainly large organizations and corporate entities which invest in liquid funds to park their temporary surpluses.
Interestingly, a significant share of fresh investor flows in May 2019 went into overnight funds, which invest in paper maturing overnight, which have minimal credit and interest rate risk.