Fund managers calm on IDBI downgrade

Bonds are a govt-backed bank, chance of default is next to impossible, says an income fund head

Despite downgrades by three rating agencies on IDBI Bank’s additional tier-1 bonds (AT-1) this week, fund managers are not distressed. Collectively, fund houses have an exposure of nearly Rs7,500 crore to these papers.

They say it’s only a downgrade and does not necessary mean default. “The schemes’ net asset value (NAV) had taken the hit early this week but got averaged out, thanks to diverse holdings,” said a senior debt fund head.

Some of the big houses which are exposed to IDBI’s AT-1 bonds are UTI Mutual Fund, HDFC MF, Kotak Mahindra MF, Birla Sun Life MF and Reliance MF.

“The bonds are of a government-backed bank and the chance of default is next to impossible. So, investors need not unnecessary be worried, though there have been quite a lot of queries from them over the past few days but it has not translated into redemption,” says an income fund head, who talked off the record.

A debt fund’s investment head said, “When IDBI launched these bonds last year, agencies had flagged concerns and it was not that we didn't consider their observations. Having said that, our investments are backed by our internal research and we see no case of money not coming back in this case.”

IDBI Bank had AT-1 issuance at a time when rating agency ICRA had flagged risks over the capability of public sector banks' ability to service coupons (interest payments). The huge losses reported by several PSBs in FY16 and their weak balance sheets, depleting revenue reserves, were reasons for the pessimism.

According to sector officials, the exposure to IDBI paper, compared to overall assets under management, is less than half a percentage point. “The management is taking several steps to keep a check on the bank’s performance, a good sign. The yield to maturity has moved up from the earlier 10 per cent to 12 per cent, which is better,” says a top fund manager.

Fund managers’ decisions on corporate debt paper have come under more scrutiny since the default of Amtek Auto in July 2015. “It’s unwise to draw parallels between IDBI Bank and Amtek,” adds the investment head cited above.