IL&FS default impact on mutual funds (2018)
The September 2018 default of Infrastructure Leasing & Financial Services (IL&FS), India’s then-largest infrastructure NBFC (Non-Banking Financial Company), caused widespread impact on Indian debt mutual fund schemes holding IL&FS bonds. The IL&FS collapse triggered:
- A liquidity crisis in the Indian NBFC sector.
- Significant losses in debt mutual fund schemes with IL&FS exposure.
- Major regulatory response including IL&FS resolution under the Insolvency and Bankruptcy Code (IBC).
- Lasting impact on Indian debt mutual fund regulation and risk practices.
For Indian retail investors, the IL&FS event highlighted concentration risk in debt schemes and demonstrated the systemic importance of NBFC asset quality.
Background
IL&FS
IL&FS was:
- India’s largest infrastructure finance NBFC.
- A consortium-owned entity (with SBI, LIC, HDFC, ABDM, IL&FS Group).
- Held AAA / equivalent credit ratings until shortly before default.
- AUM of approximately Rs 91,000 crore at time of crisis.
The default
In September 2018:
- IL&FS defaulted on commercial paper and term loan obligations.
- Rating agencies downgraded IL&FS sharply (AAA to D within weeks).
- Market access for IL&FS shut down completely.
Impact on mutual funds
Schemes affected
Many Indian debt mutual fund schemes held IL&FS bonds. AMCs with significant exposure included:
- DSP: Notable holdings.
- Aditya Birla: Some exposure.
- HDFC: Limited exposure.
- ICICI Prudential: Some exposure.
- Other AMCs in varying degrees.
Mark-downs
Affected schemes faced:
- Immediate NAV mark-down (typically 10-20% in heavily-exposed schemes).
- Redemption pressure from investors.
- Liquidity strain.
Side-pocketing application
The side-pocketing framework (2018) was implemented in this period and applied to IL&FS exposure, allowing AMCs to segregate IL&FS holdings from main scheme operations.
Resolution
IBC framework
The Indian government took over IL&FS management and initiated resolution under the IBC framework:
- Government-appointed board.
- Asset sale and resolution plan.
- Phased resolution of various IL&FS group entities.
Recovery
By 2025, the resolution had recovered approximately 50-60% of the dues, with the process continuing.
Policy implications
Concentration limits review
SEBI tightened guidelines on:
- Single-issuer exposure limits.
- Group-company aggregate limits.
- Sectoral concentration in debt schemes.
Credit-rating reliance
The event highlighted the limitations of credit-rating dependence. SEBI’s subsequent reforms emphasised:
- Internal credit assessment by AMCs.
- Liquidity stress testing.
- Material event disclosure.
Risk-O-Meter refinement
The AMFI Risk-O-Meter was subsequently refined to better reflect credit and concentration risks.
Lasting impact
Indian NBFC sector
The IL&FS event triggered a broader NBFC liquidity crisis:
- Reduced bank credit to NBFCs.
- Higher cost of NBFC funding.
- Sector consolidation.
Mutual fund debt segment
- Industry-wide caution on NBFC paper.
- Stricter credit assessment.
- Lower concentration in single-issuer / single-group bonds.
Subsequent crises
The IL&FS event was followed by:
- DHFL default impact (2019).
- Yes Bank AT1 writedown impact (2020).
- Franklin Templeton April 2020 wind-up .
The cumulative pattern drove regulatory reforms culminating in CDMDF .
See also
- Mutual funds in India
- DHFL default impact
- Yes Bank AT1 writedown impact
- Franklin Templeton April 2020 wind-up
- Side-pocketing introduction (2018)
- JPM Amtek incident (2015)
- CDMDF
- Credit quality buckets
- AMFI Risk-O-Meter
- Debt mutual fund taxation (post-2023)
- SEBI
External references
References
- Government of India IL&FS resolution framework.
- SEBI master circular on debt mutual fund concentration.
- AMFI Best Practice Guidelines post-event revisions.