India’s financial markets are suffering, and the crisis has wiped out INR8.48 lakh crore in investor wealth just in ten days. The core of this is Mumbai-based Infrastructure Leasing and Financial Services.
IL&FS was established more than 30 years old, and has been a leading infrastructure lending giant. Recently, it has defaulted on a few payments. That means the firm is in trouble and so are the investors, which are various banks, insurance companies, and mutual funds.
The gravity of the problem can be estimated from the fact that it is being compared to 2008 Lehman Brothers crisis. The event triggered a global financial meltdown.
Everyone is terrified by the cascading effects of IL&FS’s defaults. Here is all you need to know about it
About the company
IL&FS also serves a “shadow bank” –a term to refer to a non-bank financial intermediary that provides services similar to traditional banks. However, they don’t take deposits so they are not regulated.
Life Insurance Corporation of India (LIC) is the largest shareholder with 25.34% shares. Japan’s Orix Corporation has 23.54% of shares. And there are so many other shareholders across Dubai, India and other countries.
In layman words, IL&FS has run out of money and thus unable to render its services.
It has defaulted on around INR 450 crore of inter-corporate deposits (ICDs) to Small Industries Development Bank of India (SIDBI) from August 27. This month, IL&FS Financial Services also delayed the payments on ICDs and commercial papers, instruments maturing in less than a year.
The company owes INR90,000 crore in debt and the slowdown in infrastructure only aggravated the thing.
With only $27 million available, IL&FS financial services has about $500 million in repayments due in second of the current financial years.
What makes it worse is that the only assets the group possesses are those which can’t be liquidated.
The effects of the crisis
The biggest and most significant impact would be on India’s credit markets. IL&FS’s outstanding debentures and commercial papers account for 1% and 2%, respectively, of India’s domestic corporate debt market.
Moreover, its borrowings from banks, INR 57,000 crore, accounts for 0.5 to 0.7 percent of banking system loans. These defaults will be a big trouble for Indian lenders.
The steps taken
The company has already put its corporate headquarters, worth INR 1,300 crore, on the block. Around 25 projects have been put on sale. These assets may fetch up to INR 30,000 crore –only one third of the total debt. But the process may take more than a year too.
Reserve Bank of India (RBI) is conducting a forensic audit of IL&FS’s book, however it’s not official. RBI is closely working with the securities watchdog, Securities and Exchange Board of India (SEBI). They released a statement on September 23 to confront concerns of investors.
“The RBI and SEBI are closely monitoring recent developments in financial markets and are ready to take appropriate actions, if necessary”, read the statement.
A recent statement on September 24 stated that the government is also looking at the case closely.