‘A default by IL&FS would have been catastrophic’

Firm had a non-functioning Risk Management Committee that met just once, says govt.Default by firm could have led to cancellation of licences of 1,500 smaller NBFCsConsolidated group loss of Rs. 2,670 cr. in2017-18 and a leveraging of 13 times equity Concerns of a “catastrophic” impact on the financial markets if IL&FS defaulted on its future payment obligations and the high leverage levels of the company led to the government swiftly acting to get the board of the infrastructure development and finance company replaced. Further, the fact that IL&FS had a non-functioning Risk Management Committee, – it met only once between 2015 and 2018 – was a critical lapse in the overall management and governance of IL&FS, as per a report prepared by the Ministry of Finance. Leverage levels elevated “The future impact of more defaults in the [IL&FS] Group may be catastrophic for the financial stability. The leverage levels are quite elevated and need to be reduced to some manageable levels, which require new thinking and new management,” said the report sent to the Ministry of Corporate Affairs (MCA) on September 30. As per the report, IL&FS Group showed a loss of Rs. 2,670 crore in its consolidated balance sheet for the financial year 2017-18. Further, the leverage was about 13 times, as the borrowing of about Rs. 91,000 crore was on the base of equity capital and reserves of about Rs. 6,950 crore. Incidentally, the Reserve Bank of India’s Capital to Risk weighted Assets Ratio (CRAR) of 15% for Systemically Important Non-Deposit Accepting Non-Banking Finance Company would peg the leverage ratio at 6-7 times, while a CRAR of 30% for core investment company would result in a leverage ratio of about 3-4 times. A default by IL&FS could have significant repercussions, including widespread redemption pressures, sell-off in the debt market, liquidity crunch and smaller non-banking financial companies (NBFCs) shutting shop, according to the report. A possible default of IL&FS could lead to the cancellation of licences of as many as 1,500 smaller non-banking financial companies (NBFCs) due to lack of adequate capital, it added.

Source :  https://www.thehindu.com/todays-paper/tp-business/a-default-by-ilfs-would-have-been-catastrophic/article25117015.ece

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