Banks, India mull aid for UTI crunch

Millions of investors have been shaken by a downturn in the Indian stock market in recent months

By CNN's Alex Frew McMillan in Hong Kong

MUMBAI, India -- Indian banks are mulling a plan to come to the aid of the country's largest mutual fund manager.

Several banks, including three government-run entities, plan to offer the embattled Unit Trust of India (UTI) cheap loans, according to local media.

The Indian government is also exploring ways to help investors. It has been called on to restore calm, after UTI shook many small investors by freezing its most popular fund.

UTI's chairman, P.S. Subramanyam, resigned on Wednesday. That followed Monday's shock announcement that the fund-management company was stopping sales and redemptions in its flagship Unit Scheme-64 fund for up to six months.

Millions of investors worried

VIDEO CNN's Satinder Bindra looks at how the recent events at India's UTI has shaken up local investors Play video (QuickTime, Real or Windows Media)

UTI blamed the bear market for the move. Subramanyam said the reserves of the fund may be negative, prompting the company to prevent investors from cashing in their US-64 holdings until December 31.

The move has troubled millions of investors, already reeling from a stock-market crash in March and an insider-trading scandal.

Many retirees have their life savings in US-64. It was established in 1964, making it India's oldest.

To help UTI, Indian banks now plan to extend it loans below prime lending rates, according to the Economic Times of India.

The short-term loans will have a life of up to a year, the newspaper said, quoting an unnamed bank official.

Loans to help cash crunch

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The cash should help UTI meet a liquidity crunch over the next few months, as its 41 million account holders call in investments.

It could hit a cash shortage even with investors unable to call on their US-64 holdings. UTI has already been selling stock and has arranged a backup credit facility with the State Bank of India.

The government has been called on to calm investors. It is considering coming to their aid by buying part of the troubled fund.

"We're looking at all options, including the repurchase of US-64 units," Finance Minister Yashwant Sinha said Thursday. But Sinha said the step should not be considered a bailout.

Sinha has said the ban on US-64 redemptions will prompt the government to scrutinize how UTI has been operating.

UTI manages $12.7 billion (600 billion rupees), about two-thirds of the mutual fund money invested in India.

The US-64 fund is by far its biggest and most-popular offering. It has 20 million unit holders and accounts for a quarter of UTI's total assets.