One of India’s key shadow banks is in trouble. IL&FS Group, a vast conglomerate that funds infrastructure projects across the world’s fastest-growing major economy, sent shock waves through credit markets when it began missing debt repayments. That’s caused concern not just for its myriad investors, including private individuals, who had regarded IL&FS debt as rock-solid. There’s also anguish that the group’s troubles may spread to other shadow banks and crimp Prime Minister Narendra Modi’s infrastructure plans.
What is IL&FS?
More than 30 years old, Infrastructure Leasing & Financial Services Ltd. says on its website that it has helped develop and finance projects worth 1.8 trillion rupees ($25 billion). Marquee developments included the Chenani-Nashri tunnel — India’s longest road tunnel at 9 kilometers (5.6 miles). The company describes itself as the pioneer of public private partnerships, with a portfolio of about 13,100 kilometers of roads. Shareholders include India’s largest insurer, Life Insurance Corp.; its biggest lender, State Bank of India; and Japan’s Orix Corp. Its 169 subsidiaries, associates and joint ventures, critics say, make it too complex for any watchdog or credit-rating firm.
What’s gone wrong?
It’s run short of cash. As well as a recent drying up of new infrastructure projects in India, IL&FS has felt the pain from interest rates that have soared to multi-year highs for short-term borrowings. On top of that, some of IL&FS’s own construction projects, including roads and ports, have faced cost overruns amid delays in land acquisition and approvals. Disputes over contracts have locked about 90 billion rupees of payments due from the government. In the meantime, Ravi Parthasarathy, at the helm of the IL&FS empire at its inception, stepped down for health reasons in July. The Reserve Bank of India has initiated a special audit. The bottom line: IL&FS Financial Services has about $500 million of repayment obligations over the next six months. Its debts total about $12.6 billion.
Why are individual investors affected?
Some of the missed payments, which started in late August, were on commercial paper, or short-term unsecured debt. Commercial paper is a key component of money-market mutual funds, which have surged in popularity in response to low bank deposit rates and persistent inflation. Money managers have marked down holdings of IL&FS debt and one financial company temporarily halted inflows into some affected funds. Banks, mutual and pension fund managers, insurers and individuals are bracing for further losses. Among the concerns for investors is that IL&FS has made loans to its own units. The company is also in default on short-term borrowings known as inter-corporate deposits.
What’s been the impact?
The repayment crisis is helping to stoke borrowing costs in India’s credit markets, with the average yield on one-year corporate notes jumping to the highest since 2015. It’s raising questions about the affordability of some of Prime Minister Modi’s infrastructure projects. Those include awarding works of around 20,000 kilometres of national highways and ring roads in 28 major cities this fiscal year. And it’s got investors worried about leverage at other shadow banks, prompting a surge in volatility among financial stocks.
What next for IL&FS?
Rolling over debt won’t be easy. On Sept. 17, the Indian unit of Moody’s Investors Service cut the ratings on several IL&FS debt instruments to a level that signifies actual or imminent default. IL&FS is seeking to raise more than $4.2 billion selling assets, according to an internal memo seen by Bloomberg. It’s also planning to raise the group’s share capital. To be sure, many powerful players have a deep interest in preventing the group’s collapse, including those blue-chip and sovereign-backed shareholders. Indeed, the parent company is categorized by the Reserve Bank of India as systemically important, meaning it’s less likely than a regular company to be allowed to fail.
What’s likely to happen?
It’s critical, says Care Ratings, that IL&FS should sell assets and bring in strategic partners in a timely manner. India’s Moody’s unit says IL&FS is “vulnerable to a lumpy deterioration in asset quality.’’ According to Bloomberg Opinion columnist Andy Mukherjee, state-run Life Insurance Corp. — the group’s biggest shareholder — will probably have to rescue IL&FS before retail customers of money-market mutual funds turn wary.
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