The sudden downgrade of the rating of the Infrastructure Leasing & Finance Services Ltd from AA to junk bond status in early September which triggered a panic on the stock exchanges and has wiped out investors wealth valued at Rs.2 lakh crore, is a riddle in a mystery wrapped inside an enigma.
But there is reason to believe that the cause of the spectacular meltdown of IL&FS (estb. 1987) which over the past 31 years grew like a giant squid with over 300 subsidiaries, is much deeper and rooted in structural deficiencies, chronic inefficiency and poor quality of leadership in public sector institutions — Life Insurance Corporation of India (LIC), State Bank of India (SBI) and the 27 public sector banks (PSBs) which dominate the “commanding heights” of the country’s banking and finance system. The structural fault of the financial system is that banks and institutions don’t lend for terms longer than 10-12 years. On the other hand, massive infrastructure projects undertaken by infra companies like IL&FS take decades for completion, and some more to break even. Therefore the convention is that bank loans advanced to infrastructure companies are routinely rolled over and these companies continuously raise equity funding for new projects and maintain reasonable debt-equity ratios.
However, after the Vijay Mallya, Nirav Modi and Mehul Choksi bank frauds and scandals, scams-tainted PSBs stopped rolling over IL&FS loans. Simultaneously, LIC not only declined to increase its shareholding in the company, but also stalled a merger offer from Piramal Enterprises which would have enabled IL&FS to issue new equity shares at Rs.750, which would have infused Rs.8,500 crore into the company enabling it to discharge urgent debts. Since this merger was unwarrantedly stymied, a wave of panic hit the stock market, which feared cascading defaults of PSBs and NBFCs (non-banking financial companies) loans to IL&FS subsidiaries.
Inevitably, the career bureaucrats and over-promoted clerks who invariably manage LIC, SBI and PSBs failed to comprehend that IL&FS is too big to be allowed to fail, and there was no need to panic because the company’s receivables aggregate Rs.116,000 crore against its aggregate debt of Rs.91,000 crore. The pathetic condition of the Indian economy is that this gentry never could see the big picture. Thus this debacle