Rating agency ICRA today said market regulator Sebi's directive for investment caps on debt mutual funds could adversely impact the funding costs for NBFCs and Housing Finance Companies.
Certain debt mutual fund schemes, such as long-term FMPs (Fixed Maturity Plans) have been a preferred route for the NBFC (Non-Banking Finance Company) sector to raise medium to long term funds at attractive rates from the bond markets, ICRA said in a research note.
However, the latest Sebi guidelines capping the investment limits of debt MFs to one particular sector at 30 per cent of net assets would impact the funding to NBFCs, which includes HFCs as well under the regulatory framework.
As per the Sebi circular, dated September 13, 2012, Mfs have been asked to ensure that total exposure of their debt schemes in a particular sector shall not exceed 30 per cent of the net assets of the scheme.
This investment cap, however, would not apply to investments in Bank Certificate of Deposits, Collateralised Borrowing and Lending Obligation, Government Securities, Treasury Bills and AAA rated securities issued by Public Financial Institutions and Public Sector Banks.
Sebi has asked all the existing schemes to comply with these investment caps within a period of one year.
Evaluating the impact of the new regulations, ICRA said that Indian mutual fund industry has been largely investing in Government Securities and Financial sector entities (including banks) from their debt and money market schemes.
At an industry level, investments in G-Secs and financial sector account for over 66 per cent of total Assets under Management (AUM) of debt schemes, with 15 per cent in NBFCs.
Although the cap has been set at 30 per cent, ICRA said, it believes that the new guidelines are likely to impact some of the income schemes of fund houses that have a higher proportion of investments in NBFCs.
As per ICRA estimates, around one-third of total schemes would breach exceed the 30 per cent cap, even after excluding the top-rated (AAA) NBFCs that are classified as PFIs.
"We also believe that NBFCs engaged in capital market financing activities and other segments that are not eligible for bank funding could see moderation in business levels.
"Accordingly NBFCs' reliance on banking credit will go up further," ICRA said.
"However, any regulatory tightening on that front may push the NBFCs to adopt a more expensive public issue route or slow down the credit growth. Thus it will be important for these entities to have