IL&FS
Crisis of Lop - sided Development
The government of India took
over the control of an Non-Banking
Financial Company (NBFC),
Infrastructure Leasing and
Financial services (ILFS) saying
that its collapse could potentially
inflict “catastrophic” damage on
India’s “financial stability”. It may be
perplexing for the common man to
understand how the collapse of a
single company can endanger
country’s financial stability. Has the
world’s third largest economy, as
claimed by the Finance Minister
several times, became so brittle?
The ILFS was established to
lend to the ongoing infrastructure
projects. The major share holders
are: LIC, SBI, UTI, HDFC and
Central Bank of India. All are
government owned financial
entities. So, ILFS is a government
owned company functioning under
the finance ministry. The
government is appointing its
managing director and other board
members. The announcement of
takeover of ILFS is only a ruse, but
for all practical purposes it is being
managed by the government.
The ILFS as a NBFC is not
allowed to raise deposits from the
public. So, it raises funds from the
debt market and lends at a higher
interest rate to infrastructure
projects such as highways, ports,
airports, power projects etc. When
they fail to pay back the loan, ILFS
will not have money to repay the
debt it incurred from the market.
The Reserve Bank of India
(RBI) is the regulatory body for the
functioning of NBFCs in India. It has
well defined rules regarding the
deposit-liquidity-equity ratios,
which are mandatory for the
NBFCs. Both the RBI and Finance
minister ought to have known what
is going on inside the ILFS. The
credit rating agencies gave a triple-
A rating to ILFC.
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In September 2018, ILFS
defaulted on a series of payments
including Rs. 450 crore short term
loans from the public sector SIDBI
(Small Industries Development
Bank of India). It is part of the ILFS
repayment of massive Rs.3700
crore over the next six months. But
in September, it had only Rs.200
crore in cash reserves. The total
debt incurred by ILFS was
Rs.91100 crore, of which about 60
per cent is owed to public sector
banks.
When rising the market loans
ILFC floated debt-equity norms far
beyond 3:1 which could not
happen without the knowledge of
RBI and Finance minister. They
wantonly ignored the signals. On
the other hand, National Highway
Authority of India and others
defaulted on the repayment to ILFS
to the tune of Rs.16000 crore. The
PSBs are already mired in Non-
Performing assets to the tune of
Rs.9 lakh crore, the major part of
which is owed by the construction
companies involved in infra-
structure projects. And inevitably
ILFS collapsed.
How this fiasco happened? It’s
a long story that began back in
1990s with the advent of so-called
new economic policies. The World
Bank ‘advised’ the Indian
government to build infrastructure
in a big way in order to attract
foreign investment for industrial
development. The Indian govern-
ment faithfully followed this advise
without bothering to know how
much of foreign investment would
come and in to which industry to
utilize this going to be constructed
infrastructure. It is common
knowledge that the infrastructure
facilities are needed and
constructed when there is definite
setting of up industry and not the
vice versa. Instead the government
spent most of its finances and even
borrowings on building infra-
structure projects without knowing
who is going to utilize them. This is
horse-behind-the-cart policy.
Most of the toll collecting
highways, including PPP model,
failed to generate income to finance
their loan burden. That is why the
NHAI defaulted in its repayment
including ILFS. Some of the PPP
model highway projects are up for
sale and could not find willing
buyers. 14 highway projects under
PPP model have struck midway due
paucity of funds. Most of the newly
constructed power projects,
including those of National Thermal
Power Corporation, are slipping to
stressed
assets,
meaning
defaulting on repayments of debts,
because
the
Distribution
companies are not willing to buy
power from them as it is available
at around half of the rate in open
market. There are other causes
also. The costs of the infrastructure
projected were inflated to cushion
the diversion of funds to the private
participant and their political god
fathers. As a result the assets
created have actual value far less
than spent amount. Naturally, they
could not generate income far
beyond their real capacity.
At the macro level of economy,
barring a few initial years, most of
the foreign investment came in to
capture the existing industries
rather than to build new ones. At
the same time small and medium
industries are regularly closing
their shutters because the
government is pursuing the policies
that only benefits big corporate,
particularly foreign. As a result, the
contd. on page 21
Class Struggle