IL&FS Crisis: Rescue may bleed state banks

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Mumbai: The government’s move to take control of debt-laden Infrastructure Leasing and Financial Services (IL&FS) will only succeed if lenders agree to take substantial losses, sources familiar with the discussions said. The crisis-hit company’s debt pile had grown to more than Rs 91,000 crore as it rode a lending boom among so-called non-bank financial companies (NBFCs), or the shadow banking sector, which manage an aggregate loan book of nearly $300 billion. But IL&FS had compromised on corporate governance and risk management norms, the government told the company law tribunal on Monday as it explained why it intended to take over the firm. However, a senior finance ministry official said the government does not expect the ongoing problems related to IL&FS to deal an immediate hit to the capital situation of public sector banks. “We don’t think that there is any need for immediate regulatory capital for (public sector) banks as a result of the situation at IL&FS,” the official said.
The new six-member IL&FS board will prepare a revival plan, but it is becoming clear some of its lenders will need to suffer major losses, one finance ministry official said. “It may be difficult to save it (IL&FS) unless the lenders agree to take substantial haircuts,” said the official, who declined to be identified due to the sensitivity of the matter. The official added that there had been no discussions with the company’s lenders, among them India’s largest bank, the State Bank of India, and state-owned lenders, such as Bank of India and Punjab National Bank.

The sources echoed those views, saying IL&FS needed nearly Rs 15,000 crore in financial support to avert a collapse and could only be saved if lenders agreed to take a big haircut. The government has said IL&FS was presenting a “rosy picture and camouflaging” its financial statements, but still wants to ensure adequate liquidity for it to avoid further defaults. One of the government sources, however, cautioned that more defaults cannot be ruled out, as IL&FS needs to repay more than RS 25,000 crore by March 2019.