India seizes “shadow bank” to avert potential “catastrophic” impact on financial system


India seizes “shadow bank” to avert potential “catastrophic” impact on financial system

Kranti Kumara

20 October 2018

Earlier this month, India’s BJP government seized control of a little-known company, Infrastructure Leasing and Financial Services (IL&FS), saying the “shadow bank’s” collapse could potentially inflict “catastrophic” damage on India’s “financial stability.”

In explaining the government’s sudden intervention, financial observers have said the collapse of IL&FS, the country’s largest non-bank lender, could have been India’s “Lehman Brothers moment”—a reference to the September 2008 bankruptcy that triggered the global financial meltdown.

IL&FS had a triple-A credit rating as recently as August, but defaulted on a series of payments last month including a Rs 4.5 billion ($41 million) short-term loan from the state-owned Small Industries Development Bank of India. Subsequently, the government learned IL&FS has to repay a massive Rs 37 billion ($500 million) over the next 6 months, but currently has just Rs. 2 billion ($27 million) in cash reserves.

Moreover, the company is also carrying a huge debt-load of Rs 911 billion ($12.5 billion), 63 percent, or Rs 574 billion ($7.9 billion) of which is owed to banks.

India’s banks are themselves mired in crisis. Indeed, in recent years there has been a rapid expansion of lending through shadow banks such as IL&FS, because the country’s banks, themselves burdened by loans that have gone bad, have become chary in extending credit. India’s state-owned banks have a gargantuan Rs 13 trillion ($178 billion) in delinquent loans. At least $70 billion of these are “Non-Performing Assets” (NPAs), i.e., loans on which the banks have received no payment from borrowers for 90 days…

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