Everything you wanted to know about the IL&FS crisis


What is IL&FS ?

IL&FS stands for Infrastructure Leasing & Financial Services Limited. 

It is an infrastructure finance company with a pan-India presence. It operates through more than 250 subsidiaries.

The IL&FS Ltd. was founded in the year 1987 to fund infrastructure projects.

The major shareholders of IL&FS are as follows-

  • LIC- 25.3 %
  • RBI-7.67%
  • SBI-6.42%
  • HDFC- 9.02%

What is the IL&FS crisis about?

The Il&FS defaulted on several of its loans since 27th August 2018.

Subsequently, the credit rating agencies ICRA, CARE and Brickwork abruptly downgraded IL&FS and its subsidiaries from high investment grade to junk status.

These large scale defaults and credit downgrade led to a panic in the Financial Markets

What are the reasons for the crisis?

The defaults were due to a severe liquidity crunch in the company.

The IL&FS is a non-bank financial institution. As it cannot accept deposits from the public for lending purposes, it has to rely on loans to raise money.

Since 2016, it has been relying mainly on short-term loans for its funding requirements. But, it extended long-term loans to infrastructure projects. It led to an asset-liability mismatch. Short-term liabilities were used to finance long-term assets.

This made the company vulnerable to a liquidity crisis as its assets generate returns only in the long term.

The company has over Rs.91000 crore in debt.

There has also been a slowdown in the infrastructure sector which has impacted the returns of IL&FS.

IL&FS has also been facing higher borrowing costs due to the rise in interest rates in the economy. It is one of the reasons that IL&FS reported a consolidated loss after tax of Rs 2,394.7 crore in 2017-2018 versus a profit after tax of Rs 292.5 crore a year earlier.

Also, the loans to the company were extended by banks, Mutual Funds, NBFC etc. So, they felt the impact as well. The stock market plummeted triggering fears of a wide-spread collapse.

On Sept 21, DSP Mutual Fund sold ₹200 crore-₹300 crore worth of commercial papers of Dewan Housing Finance (DHFL) at a discount. Dewan Housing Finance had lent Rs.649 crores to IL&FS.

It led to a fear of the IL&FS crisis turning into a financial crisis.

What next?

The Government had to step in. The IL&FS Ltd. and the Government moved National Company Law Tribunal (NCLT)  to dissolve the existing board and appoint a new board.

The new board was appointed by the Centre on 1st October.

The board has been tasked with the responsibility of turning around the company.

There are 6 members on the reconstituted board.

The Government has also launched an investigation by the Serious Fraud Investigation Office into the mismanagement and corporate governance failure in the company.

The Non-Bank Financial Institutions (NBFCs) have been facing difficulty in raising money after the bankruptcy of Infrastructure Leasing & Financial Services (IL&FS). The RBI had agreed to ease liquidity in the system by buying Government securities worth Rs.8000 crores (also known as Open Market Operations) on November 22.

You may also read- Key takeaways from the Centre & RBI board meeting

Have any Question or Comment?

2 comments on “Everything you wanted to know about the IL&FS crisis

Sandeepan Bose

The purpose of ILFS was to shield the retail banks from the nitty gritties of monitoring long term projects yet enable the Public Sector Banks to finance infrastructure projects.

ILFS has failed miserably to meet it’s nemesis. But I will not lose my faith in such arrangements. We Indians lack character. We have to build up our character. Let this be a lesson.

Reply
Akshay Jassal

very informative.

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