Rising liquidity issues in Infrastructure Leasing & Financial Services (IL&FS) are credit negative for Indian banks and debt market, Moody’s Investors Service said in a report.
“As of 31 March 2018, debts incurred by IL&FS in the form of bank loans accounted for around 0.5%-0.7% of overall banking system loans. We do not expect the exposure of any rated bank to exceed 2% of its loan book,” Moody’s said.
“One particular asset challenge for banks in a potential IL&FS default comes from the company's complex corporate structure, which could result in high variation of ultimate losses across banks depending on where the banks’ specific exposures lie,” it said. Moody’s said IL&FS group’s repayment risks would remain significant because of the weakening of its credit metrics.
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“Over the last decade, debt in the group has increased significantly on account of significant investments in new infrastructure ventures. This is reflected in the group’s overall leverage of 9.8x. The leverage at IL&FS Transportation Networks is also high at 7.2x,” it said.
‘Infra business to blame’
“IL&FS’ infrastructure business is a root cause of its current distress. It is a roads operator, and also has a few other transportation projects such as metro rail operations. Some of these projects have been affected by rising financial distress, including traffic shortfalls below projection, cost overruns and compensation disputes with regulators,” Moody’s said. It said the banks’ exposure to IL&FS’s weak road projects may not have been recognised as NPLs on account of an expectation of parental support.
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“Aside from their direct loan exposure, banks are also vulnerable to an ILFS default through the potential impact on India’s domestic debt markets. As of 31 March, ILFS had outstanding debentures and commercial papers, which accounted for 1% and 2%, respectively, of India’s domestic corporate debt market,” it added.