IL&FS Defaults Spark Panic in Indian Financial Sector
Infrastructure Leasing and Financial Services (IL&FS), one of India’s significant non-banking financial institutions, has recently defaulted on its assets worth almost $13 billion sparking concerns over India’s financial market.
IL&FS has spearheaded many projects in India related to areas such as transportation, energy, and environmental related affairs. It currently serves as a major infrastructure finance and conducting group, providing both financial assistance and technical expertise and advice for infrastructure building projects.
Lack of prolific growth in the Indian economy in recent times compelled IL&FS to halt a significant number of their projects. The financial institution was not able to pay firms that wanted to pursue technical and infrastructure projects. This ultimately led to IL&FS defaulting on a number of its loans. The ensuing result is just as what many may expect it to be. Investors began to lose confidence.
Ananth Narayan, a former banker, prominently delineated the concern that investors are experiencing regarding the current credibility of the non-banking financial sector. "There are definitely some uncomfortable questions about the liquidity, assets quality and credit ratings of many non-banking finance companies. We had a lot of such firms and they have proliferated," he stated.
Prior IL&FS’ downfall, there were several signs foreshadowing its current situation. Ravi Parthasarathy, former IL&FS Chairman, stepped down from his position after holding it for 3 decades. Shortly after, the institution began to receive poor ratings. Initial ratings drop from AAA to AA+ eventually plummeted into the “ junk” class.
The ultimate remedy was prompted by the Indian government, which fired the management of IL&FS and agreed to cover its $12.5 billion debt. However, many believe that the government could have acted earlier. Experts have cited Walter Bagehot who in 1873 stated that an impending financial crisis should be counter-attacked by the central bank lending ”quickly, freely, and readily.” Although the Indian government taking control of the institution should restore some confidence back to the investors, many are still in awe of the government’s delayed response.
"The government, regulators, board, and auditors allowed this crisis to grow into this mess.” claimed analyst Pranjal Sharma. Some argue that a slightly longer delay in response from the government could have led to the 2008 crisis repeating itself.