Opinion | Bond market woes and RBI’s debt mutual fund rescue

On Monday, the Reserve Bank of India (RBI) opened a special window of 50,000 crore for mutual funds (MFs) to tide over a liquidity crisis that has shaken investor confidence in one of India’s most popular modes of retail investment. The market had been anticipating it. Mint made a case for RBI aid in a Saturday Quick Edit on Livemint.com. Also, calls arose over the weekend asking for the central bank to do what was done in a similar situation back in 2009. The crisis that erupted late last week involved only debt funds, which had 11 trillion in assets under management (half of the MF total); even within the debt segment, the crisis was restricted to schemes with money in bonds that were investment grade but not rated triple-A (supersafe, that is), nor issued by the government (the safest kind). Unusually high redemptions were seen in this sub-category, the result of a mix of events that can be traced to India’s lockdown. There was a surge in demand among MF holders for cash, not just among firms and individuals to make year-end tax payments, but also in response to squeezed inflows. So badly strapped did this leave Franklin Templeton AMC for payout funds, that despite borrowing 4,000 crore from banks, this asset management company froze six of its schemes last week and six more after that, trapping the money of its investors.

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Opinion | The backstory of reserve bank of India’s cash window for mutual funds

In the weekend that went by, little housework got done in the homes of officials of the Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI) and some fund house leaders. On Friday, 24 April, the full impact of an announcement late the previous night by Franklin Templeton Mutual Fund was digested by the markets, regulators and investors. The fund house had frozen six of its high-yield debt funds with over 30,000 crore of investor money. Friday saw panicked investors, some on the advice of bank wealth managers, selling their credit funds across fund houses without a thought to how much risk they really carried. The panic threatened to spill over to other non-credit risk debt funds as well. Mutual funds have a certain calculation of how much redemption will take place on a day and have cash ready for that. But when there is a sudden rush of redemptions, funds can borrow up to 20% of their net assets to meet this redemption. What happened with Franklin Templeton MF is that even with that borrowing the sell requests piled up, leading to this first-of-its-kind decision to freeze the funds.

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Finding evidence of banks mis-selling

Mystery shopping working paper

Misled and Mis-sold: Financial misbehaviour in retail banks?


My Mint column: Here is proof that banks mis-sell

Anybody who has walked into a bank branch in a metropolitan city would have been pushed towards a financial product that he or she didn’t want. Worse, they may have been forced, cheated into or otherwise pushed towards buying life insurance policies. I documented my own search for a Public Provident Fund account two years ago: http://bit.ly/1sye5F8 . A question asked very often by readers of this column is this: why don’t the regulators or government stop this coercion? The banking regulator, for a long time, took the view that mis-selling of third-party products was not their problem, but rested with the product regulators. The capital market regulator said that it could not tread on the Reserve Bank of India’s (RBI’s) toes. The insurance regulator put down these instances to the overactive imagination of some illiterate journalists.

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My Mint policy column: Yes, banks mis-sell. Now what?

I wrote last week about the results of the research that household finance economist Renuka Sane and I did, which showed how banks mis-sell third-party financial products in India. You can read the column here and hear a podcast in which Mint editor R. Sukumar talks about the research here. I received a lot of emails from people who wrote in with their individual stories on bank mis-selling. Many of them have stories that follow our findings to the letter. The story is this: your bank knows how much money sits in your account and will contact you when you go to make a fixed deposit (or a public provident fund or a locker or a loan) to hard-sell a life insurance policy.

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A Mint edit: The cost of mis-selling financial products. Mint edit, August 24, 2016.

Most of economics can be summarized in four words. ‘People respond to incentives.’ The rest is commentary,” claimed economist Steven E. Landsburg in his best-selling book The Armchair Economist: Economics and Everyday Life. The problem in real life arises when incentives are not properly structured.

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A Blog: Banks are unfair in their role as financial advisors / distributors

A major weak link in financial regulation in India is the lack of emphasis on consumer protection. An academic literature on this subject has been building up. The policy discourse has also shifted considerably, and the contours of the policy research and action program are now visible.

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A policy blog: How can financial regulators combat mis-selling? Five solutions

In a previous article (Banks are unfair in their role as financial advisors / distributors), we described our audit study on the sale of financial products across 400 bank branches in Delhi, India (Halan and Sane, 2016). In this paper, we found three things:

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A podcast: Mint editor R Sukumar on the bank mis-selling paper.

Hear it here