Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Nearly All The Loans Advanced By IL&FS Group’s Lending Arm Have Turned Bad

As much as 90 percent of the loans advanced by IL&FS Financial Services Ltd., the lending arm of the troubled infrastructure conglomerate, have turned bad, again highlighting the challenge the government-appointed board faces in bringing the group back to solvency.

Of its loan book of Rs 18,805 crore, Rs 10,656 crore was lent to third-party borrowers and nearly Rs 7,000 crore to group companies, N Sivaraman, chief operating officer at IL&FS group, said at a press conference.

For context, IDBI Bank Ltd., India’s worst bank by asset quality, had a gross NPA ratio of 29.76 percent as of December.

IFIN is using all legal methods, including the Insolvency and Bankruptcy Code, one-time settlements and criminal proceedings, to recover the loans, Sivaraman said. This is an uphill battle and the actual recovery amount might be low, he said. “The fear we have is that the clients that IFIN has extended loans have a weak credit profile.”

According to Kaushik Modak, who now heads IFIN, since the new board led by veteran banker Uday Kotak took over the IL&FS Group and constituted the new operating committee in October 2018, the non-banking finance company has recovered Rs 931 crore.

It symbolises the humongous task at hand for the new board—named after a spate of defaults despite ‘AAA’-rating to stem the possibility of a contagion. It’s looking at “a universe of options” to pare debt by capital infusion by either from existing or new investors, sale of assets and resolution with creditors. But the complex structure and scale of the group present a challenge.

Status Update

Sivaraman said the overall debt of the group stood at nearly Rs 99,000 crore, of which more than Rs 94,000 crore was in the form of funded exposure from various creditors.

Public sector banks have the highest exposure with secured and unsecured debt of over Rs 35,000 crore. Other creditors to IL&FS Group include investors who bought non-convertible debentures, corporates, non-bank lenders and state governments, among others. Over Rs 48,000 crore of the total debt was concentrated in four holding companies: IL&FS, IFIN, IL&FS Energy Development Company Ltd. and IL&FS Transportation Networks Ltd.

According to Sivaraman, these companies do not have their own operating cash flows and their ability to raise fresh equity or rearrange their large debt would be very difficult. The consolidated debt was 10 times the equity of the group, he said.

“Of all the companies that are currently under insolvency do not have even the semblance of complexity in the IL&FS case,” he said, referring to level of inter-group lending and entangled operations.

To help in its revival, the National Company Law Appellate Tribunal on Oct. 15, 2018, granted the group or its 348 companies a moratorium against any legal action by creditors. Sivaraman said the NCLAT had received about 150 intervention petitions against the moratorium and the group continues to receive legal notices every day.

Kotak, speaking during the press conference, defended the need for a moratorium. The new board believes that any attempt to disentangle the group without the kind of resolution plan being implemented now would be chaotic, he said.

The NCLAT also ordered banks and other financial institutions to not classify loans to IL&FS Group and its companies as non-performing assets. The Reserve Bank of India opposed but an order is still pending.

Asset Sale

Sivaraman said about 55 domestic assets with outstanding debt of Rs 40,000 crore spread across six business verticals had been put on the block. The group has received interest from potential bidders, he said.

Apart from this, process to sell three international assets is underway. The group is also mulling sale for 10 other domestic assets, he said. IL&FS also intends to liquidate non-core assets such as real estate and vehicles. It has already sold 35 luxury cars so far, Sivaraman said.

According to Modak, the foremost priority for the new board is to ensure that it is capable of repaying all dues to creditors once recovery and asset monetisation efforts are completed.

Change In Management

The IL&FS board appointed former bureaucrat CS Rajan as the managing director, and re-designated Vineet Nayyar as the executive vice chairman.

Action Against Former Officials

Bijay Kumar, deputy managing director at IL&FS, said the group is in the midst of reviewing accounts of its companies. It is also aiding the Serious Frauds Investigation Office and the Enforcement Directorate in conducting a forensic analysis of the accounts to find instances of diversion of funds and gold-plating. The investigative agencies are collating evidence to adequately prosecute those who tried to defraud IL&FS, Kumar said.

The SFIO arrested Hari Sankaran, former chairman at IL&FS on Tuesday, for alleged abuse of power.