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Will The IDBI Bank Downgrade Dent Your Mutual Fund Investments? - Outside View by PersonalFN

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Will The IDBI Bank Downgrade Dent Your Mutual Fund Investments?
Jun 8, 2017

Some mutual fund houses have incurred about 15%-20% losses on their investments. If you thought stocks might have corrected heavily, causing such a dent, you are mistaken. The losses fund houses are sitting on have been incurred under debt schemes, not under equity oriented schemes.

Shocked?

Please don't be.

Indian banks have been feeling the pinch of the deterioration of asset quality and in turn, the weakening of their financial profile. Fitch Ratings, an independent credit rating agency, downgraded the credit rating of IDBI Bank's Long-Term Issuer Default Rating (IDR) from 'BBB-' to 'BB+'. Mutual fund houses collectively have an exposure of about Rs 7,400 to the bonds issued by IDBI Bank.

Following this sharp downturn, the Net Asset Values (NAVs) of schemes holding downgraded bonds have fallen massively. Surprisingly that hasn't caused any panic among mutual fund houses.

As on March 31, 2017 the Government's shareholding in IDBI bank was 73.98%; and fund managers are probably relieved by this. The Government may not let IDBI Bank default its debt obligations, as that will be seen as a default by the public sector company.

The bank's management remained confident about improvement in prospects. Mr M K Jain, MD, IDBI Bank in a media interview stated, "We are looking at all avenues to improve our capital position and bring the bank on the recovery track."

"We will look at aggressive recovery and cost cutting measures and plan to churn our corporate book and risk-weighted assets which should also ease the pressure on capital", he added.

Reacting to the news of ratings downgrade, the group president and head-fixed income of UTI Mutual Fund, Mr Amandeep Chopra said, "In our view, GoI through its shareholding and due to the critical importance of the bank within the sector, has an obligation to support the bank and will continue to do so in order to maintain minimum regulatory capital requirement to Smart Investing meet interest payment obligations."

Mr. Chopra's stance remained optimistic about the repayment of the outstanding debt, "We do not believe that the bank will default as the credit strength of the bank still lies in the majority government shareholding at ~75%."

It remains to be seen how this story shapes up, however in IDBI's case, the risk of defaulting appears low. Nonetheless, mark-to-market losses may continue to put the funds' NAV under tremendous pressure. Even after this sharp slide, there may be limited takers of the troubled bonds, and fund houses that hold long-term debt of IDBI may be stuck with their holdings.

Do you still think debt funds are safe? They are not. And so you always need to be watchful about your choice of a debt fund. Please don't forget to check your time horizon and risk appetite before investing in any of them.

If you can't find a suitable debt fund for your portfolio, you may like to try "Debt Select"--an unbiased research report service offered by PersonalFN.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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