IL&FS default was one of the biggest in India and could have easily become the Lehman kind of contagion for Indian markets. With its 12.6 Billion $ debts the IL&FS was a disaster had government not stepped in and saved countless lives.
Last Monday government acknowledged that “The restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of capital and financial markets.” and with it carried out a silent coup that ousted the present board of the company, used LIC to stabilize the losses and then got Asia’s richest banker, Uday Kotak to get at the helm of operations.
The risk from IL&FS was systematic in nature. Nearly 65% of all debts that IL&FS has is from public sector banks. Its top share holders include LIC of India, State Bank of India, Orix Corp (Japanese) and Abhu Dhabi Investment Authority. The sell off in IL&FS securities by Mutual funds would have collapsed the bond market which would have even dented the sovereign bond rates.
The collapse of IL&FS could have also sparked a liquidity crunch, hit market sentiment and impacted profitability at NBFCs.
Now that the containment seemed to have been achieved, the road ahead is not easy. The company took short term loans to finance long term infrastructure projects, this means that even if balance sheets had profit in them, the liquidity within the company is way short to fulfill its debt obligations. For recapitalization of the company either the loans will be restructured or projects will have to be sold – both not an easy task given the political marathon with the five assembly state elections has just started and before Mar 2019, when India votes for a new national government, Modi will not have any political capital to defend fundamentals of economics.
But first things first. At least the day has been saved and the fund managers now have a breather to plan for IL&FS’s resurrection or demise. A big thanks to Modi government for moving in, when it did.