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IL&FS Crisis case study: Everything you need to know

Before we understand the IL&FS Crisis, let’s get a perspective of what was the situation back then and understand what IL&FS is. Infrastructure leasing and financial services were created by Ravi Parthasarathy (who left the company after three decades of leading it when the defaults of the company and its subsidiary came to light, basically the board tried to hide the default problems till it got out of control).

IL&FS is a shadow bank, which means it does not receive deposits as the traditional banks do. Due to the fact that it does not receive deposits, it has regularly escaped legal procedures. It claims to have completed projects worth 25 billion in Indian and foreign markets. LIC Is the largest stakeholder of the organization with about 25.34% share, Japan-based ORIX holds 23.54%, Abu-Dhabi based ADIA holds 12.56%, HDFC bank owns 9.02%, Central bank of India holds 7.67% and SBI holds 6.42%. Further IL&FS has various subsidiaries, the subsidiaries are needed because government mandates that each concession based infrastructure project needs a separate subsidiary (this led to a labyrinth of 256 connections, consisting of subsidiaries, associates and joint ventures).

What’s the problem?

News report claim that the IL&FS have been subsequently defaulting on the loans, unable to repay their debts, one of the reports claimed that it has defaulted on a loan of 1000 cr. From SIDBI, while a subsidiary has further defaulted on 500 cr. loan to development finance institution. IL&FS has a consolidated debt of 91 crores, where IL&FS holding 35 cr. alone and, IL&FS financial services holding 17 cr.  Why are loans so high? IL&FS, per the reports, has overrun the cost for constructing roads amid delays and acquisitions. The company has also been impacted by increased interest rates and short term loans.

Why should we be worried?

IL&FS is connected to multiple banking and insurance companies, this defaulting may lead to loss of confidence (Although this will not lead to the 2008 crisis which was followed by the fall of Lehman Brothers, as per the Government reports). Which can further lead to banks not providing loans to non-banking institutions? Furthermore, non-banking institutions raise funds from the market assets like Mutual funds 2.65 lakh cr. of exposure has been pegged in the last 5 years. IL&FS has defaulted on commercial papers which can certainly lead to a loss of confidence in these non-banking institutions.

What may have led to the IL&FS Crisis?

How is the management involved? In a statement released from Hamindra Hazari, an independent analyst, he mentions how the board and the management have neglected its duties as a risk evaluator, he mentions that the committee has met only once in 4 years, the last meeting was held in 2015. Furthermore, even when the default rates were higher, there was a considerable increment to the compensation of the board and its members. What is more shocking, even after all the defaults and problems, credit rating agencies such as ICRA and CARE (Although, they had given an explicit warning, but did not see the chaos coming) have given IL&FS AAA rating even after having the information regarding IL&FS board’s complete neglect of risk management in the public domain and giants like SBI and HDFC did not realize the negligence.

Should IL&FS be bailed out?

Most of the independent analysts disagree, simply due to the fact that the defaulting may cause a cascading effect, and giants like SBI and HDFC will be affected, companies will be forced to wipe out 20,000 cr. worth of Mutual funds, which may further cause an imbalance in the market.

How is the Government trying to resolve this issue?

IL&FS isn’t really a Government organization, however owing to the presence LIC, SBI and HDFC, and staffed with plenty of government bureaucrats it behaves pretty much like a Government company. The Government has, for now, has taken charge of the IL&FS board (this has happened for the first time after 2009 during the Satyam scam) and after sacking the members from the previous board, has appointed a board with notable names such as Uday Kotak (Chairman), Vineet Nayar, GN Bajpai, GC Chaturvedi, Malani Shankar, Nand Kishor. Furthermore, giants like SBI and LIC are ready to pay enough money to meet their repayment obligations.

So this was the IL&FS crisis – we hope you liked it, this is an old piece, we’ve grown a lot after this. Take a look at us here.

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