INSUBCONTINENT EXCLUSIVE:
A tad late, but the message is finally reaching India's regulators: Infrastructure lender ILFS is not a business that can be allowed to
fail without consequences
An unusual Sunday evening joint statement by the securities regulator and the central bank suggests a much-needed awareness of systemic
risks.Infrastructure Leasing Financial Services Ltd
is a sprawling nonbank institution that used its highly rated paper to chalk up $12.5 billion of debt, which it funneled into the financing
of long-term assets like roads, townships and water-treatment plants
Most of these businesses are owned by ILFS-linked operating companies.The opacity masked growing liquidity problems, though only up to a
Some of the group's finance companies are now missing repayments on short-term paper, even as the unlisted parent's owners, including
state-run Life Insurance Corp
of India, dawdle over an emergency infusion of funds.The task of highlighting the systemic risks fell to equity markets
Dewan Housing Finance Corp
led the carnage on Friday when its shares fell more than 42 per cent
(They were down almost 60 per cent at one stage.) Most other shadow lenders, which make retail loans but don't take deposits, also dropped
between 12 per cent and 17 per cent.The bloodbath was sparked by the money market, where a mutual fund sold Dewan's notes at a yield of
10.75 per cent, compared with 8.6 per cent for other corporate debt locally rated as AAA.DSP Mutual Fund, which is exposed to ILFS's
securities, said its sale was a response to rising interest rates rather than a view on Dewan's creditworthiness
Now Dewan is busy convincing the market that it has nothing to do with ILFS, and that even after paying principal and interest obligations
on commercial paper, loans and other debt, it always would have had at least $1.65 billion of surplus liquidity through March 2019.The
Indian authorities shouldn't have waited for a self-fulfilling liquidity crisis to raise its head
It was obvious that investors would want to dump mutual funds they believe will now have to write down their ILFS exposure
Funds, in turn, would have to sell other paper to meet redemption requests.As secondary market yields surged for nonbank lenders' debt,
their ability to roll over short-term obligations will be tested, and their equity prices will fall
Credit-rating companies, bruised by their inability to see ILFS defaults coming, won't want more investor criticism for being late
Hasty downgrades will push up borrowing costs even more.Even securitization of affordable home loans - a taxpayer-subsidized mortgage line
growing by leaps and bounds - won't work
Investors may still like the home loans, but if the financier who's supposed to collect monthly checks for 15 to 20 years might struggle
to survive that long, who'll want to buy into a portfolio of its loansThat, then, is the risk of leaving ILFS unresolved
Its $12.5 billion in liabilities may be small beer compared with the $210 billion bad-loan debacle at deposit-taking Indian banks
But the poorly run state-owned banks still get 78 per cent of sticky household deposits and have access to both interbank liquidity and the
central bank's emergency lines
They're part of an inner circle of trust
ILFS, despite its pretensions to being quasi-sovereign, isn't in that circle.Mutual funds that supply liquidity to shadow banks have been
caught unawares by the ILFS fiasco
It doesn't look as if they have the capacity to go beyond ratings reports and independently price risks, so they may now overcompensate and
make matters worse for healthy nonbank lenders.As I've said, ILFS was threatening to become India's mini-Lehman moment
So far, money-market risks have spilled over into equities
If the unease spreads the other way around, things could get uglier still
(While Dewan's shares recovered some of their losses Monday morning, most other Indian finance stocks fell again.)That's why it's
important for the Reserve Bank of India to join forces with the Securities and Exchange Board of India to deal with the fallout
Their urgent first step must be an emergency bailout of ILFS, before it does more harm.(Andy Mukherjee is a Bloomberg Gadfly columnist
covering industrial companies and financial services
He previously was a columnist for Reuters Breakingviews
He has also worked for the Straits Times, ET NOW and Bloomberg News.)Disclaimer: The opinions expressed within this article are the personal
The facts and opinions appearing in the article do not reflect the views of TheIndianSubcontinent and TheIndianSubcontinent does not assume
any responsibility or liability for the same.
