Fears of a liquidity crunch following the IL&FS crisis hit the mutual fund industry in September. Cash plans or liquid funds were the worst hit.
According to data from CAMS, a mutual fund registrar which covers 85 percent of the industry flows, cash plans or liquid funds saw outflows worth a whopping Rs 69,694 crore.
Ultra liquid schemes also suffered from net outflows of Rs 19,479 crore last month.
Not only cash plans all categories in the debt segment also registered outflows, barring fixed maturity plans. MF experts said industry faced huge redemption pressure in September after liquidity in the banking system tightened.
The liquidity crunch was largely attributed to the advance tax payments coupled with default in payments by IL&FS.
Lakshmi Iyer, Chief Investment Officer-fixed income & Head Products, Kotak Mutual Fund agreed that mutual funds were facing sporadic redemption last month due to issues related to commercial paper (CP) default of an entity.
The crisis started by Infrastructure Leasing & Financial Services (IL&FS), an unlisted infrastructure lending giant aggravated on September 17 after it defaulted on interest payment CPs. The company’s debt was downgraded in the following few weeks for multiple defaults.
The 43-player mutual fund industry manages Rs 13.73 lakh crore of fixed income assets of which Rs 2,700 crore of bonds and commercial papers were issued by IL&FS and its subsidiaries, according to mutual fund’s monthly portfolio disclosures in August. September data is yet to be released.
The market was concerned that the bonds issued by other IL&FS subsidiaries like IL&FS Transportation, IL&FS Tamilnadu Power, IL&FS Energy Development and IL&FS Security Services could be downgraded in the near future.
On September 10, rating agencies ICRA and CARE downgraded non-convertible debentures of IL&FS to BB from AA+. ICRA said the downgrade reflects "rising pressure on liquidity at the group level due to sizeable repayment obligations".
ICRA also downgraded the short-term rating for a Rs 4,000 crore commercial paper programme of IL&FS Financial Services, a subsidiary of IL&FS, to ‘A4’ from ‘A1+’.
IL&FS Financial had informed exchanges the company would not be able to issue any commercial papers till February 28, as it had defaulted on payments on two papers, which were due to mature on August 28 and August 30.
The first signs of trouble in the IL&FS group emerged in June when it defaulted on inter-corporate deposits and commercial papers (borrowings) worth around Rs 450 crore. Over the next 2-3 months, at least two rating agencies downgraded the company’s long-term credit rating.
IL&FS Financial Services defaulted on seven of its debt obligations in September, according to a statement to the exchanges.
In all, the IL&FS group owes over Rs 91,000 crore.>