Rs 530-bn banks' exposure to IL&FS critical to financial stability: Report

IL&FS defaults could be catastrophic for the financial system, a report on the progress and the way forward for the group under the new management has said. 

“The cascading impact of the default by the IL&FS group on the financial sector would be quite substantial as evidenced from a partial default of some companies and its repercussions in the financial market in the month of September, 2018,” said the report, submitted with the National Company Law Tribunal (NCLT) on Wednesday. 

“The future impact of more defaults in the group, if not addressed in an orderly manner, may be catastrophic for the financial stability,” the report stated. 

The reason why the IL&FS group has assumed such importance is because of the Rs 910 billion in debt that it holds in its widely dispersed books, Rs 570 billion belong to public sector banks and institutions. Also, “the majority of the capital invested in IL&FS is by public financial institutions such as the Life Insurance Corporation of India, State Bank of India, Central Bank of India, besides UTI  AMC, etc,” the report said, citing the original petition of Ministry of Corporate Affairs. 

Based on a confidential note dated September 30, 2018, from the Department of Economic Affairs, the MCA also noted that on a consolidated basis, the borrowing of IL&FS from banks and financial institutions (debentures, loans, cash credit and commercial paper) comes to about Rs 630 billion according to the 2017-2018 balance sheet. 

Banks’ exposure to IL&FS was Rs 530 billion — 16 per cent of their total exposure to the NBFC sector of Rs 3.3 trillion. This makes the IL&FS group “not inconsequential, but, critical to the financial stability”. 

“Therefore, there is substantial public interest in ensuring financial solvency and good governance and management of this group,” the report noted. 

Apart from the direct financial impact, the IL&FS group is involved in many infrastructure projects through project financing, equity and debt financing. 

“Any sudden impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector, financial markets and the economy, considering its systemically important nature and its borrowing level of Rs 910 billion,” the progress report said. 
 

“Therefore, the timely intervention by the Union of India was required to prevent collapse of the IL&FS group and to limit the contagion effect on the markets,” it added.

‘CATASTROPHIC FOR SYSTEM’

• IL&FS defaults could be catastrophic for the financial system, a report said
• The majority of the capital invested is by public financial institutions such as 
• LIC, SBI, Central Bank, besides UTI AMC, etc
• The borrowing from banks and financial institutions comes to about Rs 630 billion, according to the 2017-2018 balance sheet
• Banks’ exposure to IL&FS was Rs 530 billion — 16 per cent of their total exposure to the NBFC sector of Rs 3.3 trillion