ECONOMIC ENVIRONMENT OF BUSINESS
Report on:
IL&FS Crisis: Impact on the Indian economy
Batch 2019-20
Submitted to
Dr. Veena K Pailwar
Submitted by
Group 1
Gurpreet Singh Vilkhoo 201911012
Harshita Argade 201911013
Ishita Mehta 201911014
Mahima Jain 201911020
Priyanka Valechha 201911030
Manish Bansal 201911102
Introduction:
Infrastructure Leasing & Financial Services (IL&FS) is a non-banking financial company
(NBFC), or 'shadow bank'. Established over 30 years ago, the conglomerate funds
infrastructure projects across India. Among IL&FS shareholders are LIC, SBI, Japan's Orix
Corporation, HDFC and CBI. The subsidiaries of IL&FS include transportation network
subsidiary IL&FS Transportation Networks Ltd (ITNL), engineering and procurement
company IL&FS Engineering and Construction Co Ltd and financier IL&FS Financial
Services Ltd.
Q1. What was IL&FS crisis? Why did it emerge?
Ans. IL&FS Financial Services, a group company, defaulted in payment obligations of bank
loans (including interest), term and short-term deposits and failed to meet the commercial
paper redemption obligations due.
Consequent to defaults, rating agency ICRA downgraded the ratings of its short-term and
long-term borrowing programmes. The defaults also jeopardised hundreds of investors, banks
and mutual funds associated with IL&FS. The defaults sparked panic among equity investors
even as several non-banking financial companies faced turmoil.
There are various reasons associated with the crisis of IL&FS.
The company is majorly into investing in power, road and water projects that have high
gestation period. The company used to refinance these projects but with NPA crisis troubling
major banks, they had to take short term loans from the market which they were unable to
repay. This led to around 60% debt in such projects. This looked like liquidity problem but it
was actually solvency crisis.
Another major reason was asset-liability mismatch. There were more liabilities than the
assets to compensate.
The number of subsidiaries were much higher (348) than the reported (169) .Thus, the limited
exposure to subsidiaries became a hurdle.
Q2. What was the impact of the crisis on Indian economy?
Ans. IL & FS crisis had the following major impact that ultimately affected the Indian
economy as a whole: -
1. On individual investors: Since IL&FS had begun raising huge amounts of money
from the market by way of a commercial paper, which is an unsecured debt mean for
immediate financing needs, the worst affected are investors that include mutual
funds, individuals, banks and other companies, which offered loan by way of inter-
corporate deposits
2. On infrastructure projects: The IL & FS crisis is likely to have major effect on current
infrastructure projects. Ex- in Maharashtra, the government officials believe that the
refusal of banks to offer loans on continuing work on the highway for the Mumbai-
Nagpur communication Expressway is a direct result of the IL & FS crisis which has
made banks extremely wary of releasing funds for the road project. IL& FS existing
projects have also faced a critical blow some of these were in the form of PPP model
(Public Private Partnership) for developing national highways and connecting roads.
3. On credit rating agencies: The lack of transparency accountability and subversion of
credit rating agencies which are supposed to exercise principles of prudence, caution and
utmost integrity, have been highlighted by the crisis. It is likely that the government
would tighten its grip over credit rating agencies and prescribe greater punishments for
frauds.
4. On NPA crisis and the spillover on the economy: - Being an NBFC, the RBI did not
exercise as much control over operations as in the case of traditional banks The default in
payment of loans of Rs 60,000 crores will only add to the current financial distress that
the banking sector is facing due to rising non-performing assets. As a result, the spillover
on other segments of the economy is undeniable.
There is a need for a stronger regulatory regime for NBFCs, which should instead of
investing in high risk and return projects be encouraged to invest in moderate growth and
profitability projects. The Central government needs to find innovative and alternative
models of financing large infrastructure projects, while also improving corporate governance
standards for credit rating agencies.
Q3. Is Indian economy still facing financial crisis?
Ans- Twelve months later, the picture remains equally cheerless – dislocated financial
markets, risk-averse mutual funds, wary investors, a fragile NBFC industry, and an economy
where businesses are shuttering in the absence of credit, leading to worker layoffs.
•The problem was that lending to consumers was not done by the banks, it was done by the
NBFCs who from September last year till now (2019) have withdrawn Rs 3 lakh crore from
the market, which means about Rs 1.5 to 2 lakh crore has been paid back by them towards
their liabilities. So there has been a liquidity squeeze in the market.
•It manifested itself in the lack of purchase of cars and autos, purchase of real estate and
construction by real estate companies. Around 95% of vehicles may have been financed by
the NBFCs or by agents.
•The real estate companies were getting money largely from the NBFCs because they were
not getting any lending from the banks. The real estate companies are now stuck because the
projects are not going ahead and subsequently shutting down due to the ILFS crisis. The
realtors are not able to complete the projects
•The Iron & Steel industry, the auto and real estate sectors are the biggest consumers of
building material like cement which is used by a lot of companies and creates a lot of jobs.
Hence, jobs could also come down in other sectors of the economy.
CYCLICAL DOWNTURN
(less demand)
DETERIORATION OF CORPORATE BALANCE SHEET
* DECREASE IN DEMAND FOR CREDIT
* INCREASE IN DEFAULTS ON REPAYMENT
DETERIORATION IN BALANCE SHEET OF FINANCIAL INSTITUTIONS
* REDUCED FAIITH OF PUBLIC
* INCREASE IN WITHDRWAL
*REDUCED DEPOSITS
*FINANCIAL SYSTEM MIGHT COLLAPSE
