IL&FS Crisis

What is IL&FS: IL&FS is a shadow bank.

A shadow bank is a financial institution which is a non-depository bank, meaning it doesn’t receive deposits like a traditional bank. Non-deposit banks includes NBFC (Non Banking Financial Companies) and Investment Banks. As these non-deposit banks doesn’t take deposit, it has largely escape regulatory oversights.

IL&FS is a 30 years old, one of the india’s leading infrastructure development and finance company. State owned LIC (Life Insurance Company) is its largest stakeholder with 25.34% stake, Orix, a japnese company holds 23.54%, Abu Dhabi Investment authority holds 12.56%, HDFC holds 9.02%, Central Bank holds 7.67% and SBI holds 6.42% of stake.

Problem:

IL&FS has been defaulting on payment since end August 2018, means it is unable to meet its re-payment obligations of 395 crore. PTI reports, IL&FS defaulted on short tern loan of 1000 crore from SIDBI, while its subsidiary has also defaulted on 500 crore dues to the development finance institution.

IL&FS has consolidated debt of Rs 91,000 crore, with IL&FS alone having nearly 35,000 crore followed by its other subsidiaries.

Why this happened: Among other reasons, some of IL&FS own construction projects including roads and ports have faced cost overruns, amid delays in land acquisition and approvals. According to the Indian Express, dispute over contracts have locked about 90 billion rupees of payments due from government. The company is also affected by the increasing interest rates in short term borrowing.

Market sentiments:

If a biggie like IL&FS defaulting, results in loss of confidence of its investors as well as other investors in the market and they will refrain away from investing in debt instruments of other NBFC and housing finance companies. Some of the investors started taking out their money which led to fall in index. Now govt is seeking alternative to save this crisis. All the directors have resigned from the company.

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