FSAP raises concerns over rising MF exposure to NBFC bonds

Financial Sector Assessment Program (FSAP), a joint report by World Bank and International Monetary Fund (IMF) on the financial sector, has underlined the risks faced by mutual funds due to increasing exposure in bonds issued by Non-Banking Financial Corporations(NBFCs).

The report claims that the debt financing to NBFCs mainly from the insurance companies and mutual funds have risen to 38  per cent  of total liabilities.

Many fund houses have set out investor money in securities issued by NBFCs, including housing finance companies (HFCs), comprising significant  weightage  of assets under management (AUM). Also, a vast chunk is deployed with relatively newer NBFCs and HFCs resulting in growing concentration of risk.

The report says that the growing dependence on debt financing by the NBFCs should be watched closely as most of the total NBFC credit is in the infrastructure sector which may, in turn, lead to an increase in non-performing assets (NPAs).

Asset management companies face immense pressure to increase their AUM in order to stay ahead in the competition. These companies need to take a conscious call on the trade-off between their long-term credibility vis-à-vis short-term market share rankings.