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Defaulted India Shadow Bank Is Major Player in Local Debt Market

(Bloomberg) -- It’s little wonder that debt defaults by key Indian shadow bank Infrastructure Leasing & Financial Services Ltd. have shocked credit traders: not only are nonpayments rare in the country, but the conglomerate is a major player in the market.

IL&FS’s outstanding debentures and commercial paper accounted for 1 percent and 2 percent, respectively, of India’s domestic corporate debt market as of March 31, according to Moody’s Investor Services. And its bank loans made up around 0.5 percent to 0.7 percent of banking system loans, Moody’s said.

The liquidity problems at IL&FS are raising concern about broader fallout among Indian lenders, already struggling to clean up more than $210 billion of stressed debt on their balance sheets. And the group’s complex corporate structure makes problems worse -- it has 169 subsidiaries, associates and joint ventures.

In a default, any eventual losses suffered by banks could “vary significantly” according to which units they have lent money to, Moody’s said in a report this week.

The root cause of IL&FS’s current distress is its infrastructure business including road projects, which have been plagued by problems such as traffic shortfalls below projections, cost overruns and compensation disputes with regulators, according to Moody’s.

The rating company said some of the banks’ exposure to IL&FS’s weak road projects may not have been recognized as non-performing loans so far on account of expectations of parental support.

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