After Lehman Brothers fell (the anniversary of that event fell last week), the Indian mutual fund industry underwent a turbulent time during which redemptions touched mammoth proportions, creating difficulties for small and big players alike. Jaideep Bhattacharya, chief marketing officer, UTI Mutual Fund recalls those tumultuous times and the regulatory reforms that have come about since in an interview with Sanjay Kr Singh.

In the wake of the Lehman Brothers collapse, the Indian debt fund industry found itself in trouble. Could you recount what had happened then?

Post the Lehman Brothers collapse the entire financial system saw a huge liquidity crunch. Call rates reached historical heights. Banks stopped lending not only to individuals but also to corporates. Besides a financial crunch, what we saw was also a trust crunch. Those who had money felt that it was better to keep it with themselves than lend and risk losing it. In India there was more of fear psychosis rather than a fundamental flaw in the banking system.

In those days, a lot of people did not need the cash and yet preferred to redeem their investments. The mutual fund industry saw a huge wave of redemption: close to Rs 1.5 lakh crore was redeemed within a fortnight. If redemptions are staggered, it is not such a problem. It is when they happen all at a time that difficulties arise. Even large fund houses went through difficult times. To meet the redemption pressure, fund managers resorted to distress selling, in the process booking losses. This led to a decline in the NAVs (net asset values) of liquid funds, liquid plus funds, and fixed maturity plans (FMPs). And when investors saw the NAVs of these funds plummet, it set off fresh waves of redemption. Thus a vicious cycle set in.

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