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