Economic Highlights

New Delhi, 8 October 2018

IL&FS Crisis

TOTAL FAILURE OF REGULATORS

By Shivaji Sarkar

The IL&FS is a national crisis. It may or may not be a Lehman moment in Indian economy-- as is being said by the media and the government accepting it as a serious concern, not a scam -- but it has certainly questioned how the society is mismanaging its finances.

Besides, it is also a fact that people’s deposits in banks or financial institutions like LIC or mutual funds are at risk. It is also a wonder that for 31 years nobody noticed that loans were being granted on a mere guarantee on a piece of paper without a security! Even now, but for the sudden severe stock market crash and SIDBI approaching the insolvency court to recover dues and the IL&FS (Infrastructure Leasing & Financial Services) moving the company law tribunal for protection from creditors, it could have remained under garbs.

No wonder the company was downgraded to junk D -- default grade from AAA. The big surprise is how it could have super AAA rating for so long. Are the monitoring systems, including that of the Reserve Bank, so weak? Or is there a deliberate apathy and the system is being milched by the unscrupulous who are well aware of the loopholes. It means our experts, like their western counterparts who allowed the world to plunge into Lehman crisis, are equally naïve or negligent.

This possibly means that more difficult situations may be knocking on the doors as both the SBI and LIC are being told to fill the hole.

The IL&FS is a strange creature. It is dubbed as private entity but fully depends on finances from public bodies like LIC, Central Bank and mutual funds, including that of SBI and pension funds like HDFC, India Discovery Fund, Japan’s Orix and Abu Dhabi Investment Authority. Today these entities are in crisis. It means people’s hard earned money is being liquidated by various Nirav Modis and Vijay Mallyas and the nation remains a mute spectator. It may also affect fund flows from foreign companies. The country’s finance management since 1991 globalisation is in a mess. It has aggravated, the more it was tried to be solved.

This urgently calls for a study why during 1947-1991, public finance institutions or banks rarely had such dark moments despite low GDP growth. The silver lining was its high savings and internationally acclaimed secure system. 

Let the nation not forget that it is a moment as dark as had another “private’ bank, ICICI, manipulated by its CEO, Chanda Kochar and her family. Much of that is also not public knowledge. More than a Lehman, possibly IL&FS is a Satyam moment, where accounts were covered up if not fudged.

The sum total is that banks are having over Rs 12 lakh crore NPAs and a high portfolio of unsecured loans, ‘private’ or government entities – in fact nomenclature may differ but all are dealing with the poor man’s money, euphemistically called the middle class – a group that is just at the poverty line and a mistake anywhere can lead them to abyss. It also means that across the political spectrum either nobody understands the intricacy of securing public deposits or are part of the mess.

Else how would Rs 91,000 crore debt pile up with IL&FS in 2017-18? There is another Rs 5 billion such pile up with its 169 subsidiaries. May be it is not a scam, but how come most of it has been lost in the road construction and not in a year but almost over two decades.

The lending to infrastructure companies, in short the National Highway Authority (NHAI) contractors, were to be recovered through tolls. Where has the toll collection at super high rates gone? The NHAI, in various statements, has averred that not more than one-third of the collections were being paid to it. This raises a serious question: who gobbled up the toll money, which has caused an all-round inflation?

There are questions also about why at all are people being fleeced at toll gates despite high petrol cess of Rs 8 per litre, being paid by even non-highway users. The nation was given to understand that the cess would replace the tolls. This means the mess is possibly there at every step from cess to toll collection to high credit being given to “infrastructure” companies to their nor-repayment.

India is living moments of severe extortions of people’s deposits. Earlier, it was supposed to be restricted to the banks. Now it is non-banking finance companies (NBFC) like IL&FS, which stepped into to fill the banking sector void. They succeeded in growing fast and grabbing a lot of market share. But now, with IL&FS defaulting, investors will be reluctant to lend to NBFCs. This will increase cost of borrowing and impact their profitability. Corporates too, will find it difficult to raise money from NBFCs.

That the entire financial system is in crisis is evident from the way the SBI and other banks halved the levels of ATM withdrawals from Rs 40,000 to Rs 20,000 post IL&FS crisis. The banking system is having a severe cash crunch. Let the nation hope that these are not going “cashless” as the west had seen during the Lehman moment.

The government itself has hinted at it. It alleged that the debt-laden IL&FS suffered due to “mismanagement and misgovernance”.  Neither a mere change of guards, as the government has done, will solve the problem nor is any finance body secure. Repeated mismanagements, if not scandals, point to a very grim situation.

The country has not learnt. Former US President Barack Obama’s Chief of Staff Rahm Emanuel had said, “Never waste a crisis”. The IL&FS has exposed several fault lines. The 2008 Lehman crisis also started with over-leveraging by shadow banks like NBFC. It exposes the fault lines at the RBI, where the IL&FS is registered. The nation has to think twice now before trusting the regulator.

Plus, the rating agencies registered with SEBI also failed. The fees to rating agencies are paid by the rated. Giving a generous rating has incentives for the rating companies. The reality is rating is advertising and people need to treat these as scraps. Was SEBI not aware of it? The company auditors also either were too incompetent to read the books or if they did it deliberately, they are guilty of breaching public trust.

The nation needs to be aware that such unethical fault lines erode the entire finance system. Is that the difference that the nation had before 1991 and after?---INFA

(Copyright, India News & Feature Alliance)