This could be India's subprime and credit crisis which will affect the realty industry the most.
Sucheta Dalal & Debashis Basu say that withdrawals from Fixed Maturity Plans can turn into a huge problem
A full blown panic in the real estate and financial services sectors has led to the withdrawal of nearly Rs 30,000 crore from Fixed Maturity Plans of Mutual Funds in the past week alone. These funds are meeting all redemption demands by borrowing money at high rates of 20% to 24%. This may end up destroying parts of their corpus and may lead to losses for retail investors. Retail investors have (as usual) foolishly remained invested in FMPs lured by their pitch which touted them ‘safer than fixed deposits and offering higher returns and lower taxes’, on the assurance of ‘indicative’ returns, although MoneyLIFE magazine (FMPs Lose Shine) had repeatedly pointed out that the risks of FDs and FMPs are so vastly different that comparing them are like comparing oranges and apples. FMPs may end up being like the unregulated Overseas Corporate Bodies of the previous market decline. Someone needs to urgently look at what is going on inside them. Unfortunately, SEBI does not even gather data about the FMPs issued by mutual funds or the quality of securities in them.
The other problem today is super-liquid schemes that invest in the call money market. There was no regulatory oversight on these schemes and they have been allowed not to mark their investment to market and could claim to hold them to maturity even when it was a one-year paper. This has created a very dangerous situation today.
Finance and realty companies are the weakest link in the chain. Many FMPs have subscribed to short term AAA rated paper of finance and realty companies. The credit rating of these papers now looks doubtful. One finance company (belonging to the bluest of the blue chip business house whose previous finance arm was deeply involved in the 2001 scam), has also renewed its paper at an exorbitant rate of 32%.
The smarter, corporate investors are taking no chances and pulling out funds and exacerbating the salutation leading to panic. No regulator has bothered to collect data on the investment pattern of FMPs and liquid schemes and keep tabs on it. As result, the systemic risk posed by the redemption runs on these schemes and the shaky underlying debt securities in their portfolio is suddenly upon us and nobody knows whether the RBI should look into it or SEBI or both. Mutual funds that are borrowing to meet redemption are refusing to utilise their bank credit for this emergency, because they feel that it will only put information in the public domain and cause a run on the fund.
Sucheta Dalal & Debashis Basu say that withdrawals from Fixed Maturity Plans can turn into a huge problem
A full blown panic in the real estate and financial services sectors has led to the withdrawal of nearly Rs 30,000 crore from Fixed Maturity Plans of Mutual Funds in the past week alone. These funds are meeting all redemption demands by borrowing money at high rates of 20% to 24%. This may end up destroying parts of their corpus and may lead to losses for retail investors. Retail investors have (as usual) foolishly remained invested in FMPs lured by their pitch which touted them ‘safer than fixed deposits and offering higher returns and lower taxes’, on the assurance of ‘indicative’ returns, although MoneyLIFE magazine (FMPs Lose Shine) had repeatedly pointed out that the risks of FDs and FMPs are so vastly different that comparing them are like comparing oranges and apples. FMPs may end up being like the unregulated Overseas Corporate Bodies of the previous market decline. Someone needs to urgently look at what is going on inside them. Unfortunately, SEBI does not even gather data about the FMPs issued by mutual funds or the quality of securities in them.
The other problem today is super-liquid schemes that invest in the call money market. There was no regulatory oversight on these schemes and they have been allowed not to mark their investment to market and could claim to hold them to maturity even when it was a one-year paper. This has created a very dangerous situation today.
Finance and realty companies are the weakest link in the chain. Many FMPs have subscribed to short term AAA rated paper of finance and realty companies. The credit rating of these papers now looks doubtful. One finance company (belonging to the bluest of the blue chip business house whose previous finance arm was deeply involved in the 2001 scam), has also renewed its paper at an exorbitant rate of 32%.
The smarter, corporate investors are taking no chances and pulling out funds and exacerbating the salutation leading to panic. No regulator has bothered to collect data on the investment pattern of FMPs and liquid schemes and keep tabs on it. As result, the systemic risk posed by the redemption runs on these schemes and the shaky underlying debt securities in their portfolio is suddenly upon us and nobody knows whether the RBI should look into it or SEBI or both. Mutual funds that are borrowing to meet redemption are refusing to utilise their bank credit for this emergency, because they feel that it will only put information in the public domain and cause a run on the fund.
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