‘A default by IL&FS would have been catastrophic’

Drowned by a wave: A default would have had significant repercussions for the debt market.  

Concerns of a “catastrophic” impact on the financial markets if IL&FS defaulted on its future payment obligations and the high leverage levels of the company led to the government swiftly acting to get the board of the infrastructure development and finance company replaced.

Further, the fact that IL&FS had a non-functioning Risk Management Committee, – it met only once between 2015 and 2018 – was a critical lapse in the overall management and governance of IL&FS, as per a report prepared by the Ministry of Finance.

Leverage levels elevated

“The future impact of more defaults in the [IL&FS] Group may be catastrophic for the financial stability. The leverage levels are quite elevated and need to be reduced to some manageable levels, which require new thinking and new management,” said the report sent to the Ministry of Corporate Affairs (MCA) on September 30.


As per the report, IL&FS Group showed a loss of ₹2,670 crore in its consolidated balance sheet for the financial year 2017-18.

Further, the leverage was about 13 times, as the borrowing of about ₹91,000 crore was on the base of equity capital and reserves of about ₹6,950 crore.

Incidentally, the Reserve Bank of India’s Capital to Risk weighted Assets Ratio (CRAR) of 15% for Systemically Important Non-Deposit Accepting Non-Banking Finance Company would peg the leverage ratio at 6-7 times, while a CRAR of 30% for core investment company would result in a leverage ratio of about 3-4 times.

A default by IL&FS could have significant repercussions, including widespread redemption pressures, sell-off in the debt market, liquidity crunch and smaller non-banking financial companies (NBFCs) shutting shop, according to the report.


A possible default of IL&FS could lead to the cancellation of licences of as many as 1,500 smaller non-banking financial companies (NBFCs) due to lack of adequate capital, it added.

Fear of contagion

“Given the systemic importance of IL&FS, the issue has led to fear of a contagion on other NBFCs and further to NBFC fed sectors like automobiles.

The fear is also due to lack of proper information in the market about the financial status of 169 unlisted group companies,” stated the Finance Ministry report.

The government report also highlighted the fact that mutual funds have an exposure of about ₹2,800 crore towards IL&FS bonds and fund houses would get redemption pressure from corporate clients and the illiquid corporate debt market and the recent sell-off in Dewan Housing Finance Ltd. (DHFL) may force asset management companies to sell government securities.


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, it said.

“... there is a need to immediately stop further financial defaults and also repay the past defaulted dues to the claimants. This would require a combination of measures of asset sales, restructuring of some liabilities and fresh infusion of funds by the investors and lenders,” stated the government.

“... the present management has lost all credibility to service any further financing to the company... the replacement of the existing management by the new management would be the first step towards restoring that confidence and to avoid any suboptimal liquidation of assets.” it added.

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Printable version | Jan 18, 2022 3:43:11 PM |

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