MUMBAI: Banks and mutual funds scrambled on Thursday to contain the fallout of the default by Altico Capital, with investor attention turning to non-banking finance companies’ liquidity problems on the eve of the first anniversary of IL&FS’ bankruptcy.

On Friday, ratings agency India Ratings & Research cut Altico’s creditworthiness to ‘D’, or ‘default’ category, from A+ earlier. Care, another ratings agency, downgraded the finance company’s debt to below investment grade.

Meanwhile, mutual funds such as UTI and Reliance Nippon AMC rushed to ring fence the value of their debt schemes by segregating, or ‘sidepocketing’, Altico’s securities.

“The revision takes into account Altico’s significant exposure to real estate sector which is witnessing a slowdown and experiencing heightened refinancing risk which is reflected to an extent with moderation in asset quality of the company,” Care said in a statement.

Shares of banks and non-banking finance companies (NBFCs) ended mixed on Friday as some investors fretted about a possible repeat of last year’s scare and subsequent market meltdown caused by the default and eventual bankruptcy of IL&FS.

The default in the last week of September 2018 had triggered a market crisis and brief credit shutdown to over-leveraged finance firms and their clients.

Many NBFCs are yet to recover from the 2018 crisis, and investors are still nervous about the poor liquidity condition of many small players. On Friday, mutual funds were quick to take advantage of ‘sidepocketing’ rules put out by the Sebi after the IL&FS crisis, which allow funds to segregate illiquid securities from defaulting companies till the fund houses are able to realise some value from these papers. The process creates two schemes — one that contains the illiquid paper and the other holding the good ones. As and when fund houses are able to recover money from Altico Capital, it will be distributed to investors in proportion to their holdings in the segregated portfolio.

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UTI Credit Risk Fund, with assets of Rs 3,536 crore, has an exposure of Rs 202.82 crore to Altico papers (5.85% of assets under management). Reliance Ultra Short Duration Fund, with assets of Rs 3,258 crore, has an exposure of Rs 150 crore (4.61% of assets under management).

In a note, UTI Mutual Fund said existing investors shall be allotted the same number of units in the segregated portfolio of the scheme as in the main portfolio. “No subscription and redemption will be allowed in the segregated portfolio. The AMC will disclose separate NAV of segregated portfolio and enable transfer of such units on receipt of transfer requests,” it said. Reliance Nippon AMC said it will suspend all subscriptions in the affected fund from September 13 till further notice. The fund house said it had informed investors about the segregated portfolio in the scheme and given them time till September 24 to redeem units. The AMC said it will create a segregated portfolio on September 25.

Top Indian lenders including HDFC Bank, State Bank of India Yes Bank and UAE-based Mashreq Bank had provided a six-year, Rs 340-crore loan to Altico. On Thursday, the finance company failed to pay Rs 20 crore that was due as interest. The NBFC’s total debt amounts to about Rs 4,000 crore.

Mashreq Bank has the highest exposure to Altico with Rs 660 crore of outstanding term loans, including external commercial borrowings. Among Indian lenders, HDFC Bank has the maximum exposure at Rs 500 crore, followed by Yes Bank at Rs 450 crore and SBI at Rs 400 crore, according to a report by India Ratings.

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BANKERS SAY EXPOSURE SMALL

Spokespersons from HDFC Bank, Mashreq Bank, Yes Bank and SBI did not reply to emails seeking comment. However, officials of these banks said on the condition of anonymity that their exposure was relatively small and manageable. “Our exposure is peanuts compared to our Rs 12-lakh-crore loan book. It is half of what has been projected in the India Ratings report. I do not think this account poses any serious risk to us since we have enough securities covering the loan,” said a senior official from HDFC Bank. A senior SBI official too said his bank’s exposure was negligible. “I don’t think we have such an exposure. And even if true, it is too small to impact us. It looks like a case of cash flow mismatch that can be resolved,” he added. Some analysts, however, said the incident has heightened risks of contagion in the debt-laden NBFC sector. “If a company with such marquee investors faces liquidity stress, then it raises concerns for others. Banks will be reluctant to lend to these companies, which could worsen the liquidity squeeze,” said Nitin Aggarwal, an analyst at Motilal Oswal.





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