Banks must reclassify exposure, and ask it to sell its assets
Given it is unlikely Infrastructure Leasing & Financial Services, or IL&FS Group, will be able to repay borrowings of close to Rs 90,000 crore, shareholders of the beleaguered company should insist it start selling its assets to realise cash. With the last board meeting remaining more or less inconclusive, it is not clear whether the company will be be able to access funds in the near term to honour its commitments.
The issue is expected to be discussed at today’s board meeting; IL&FS will reportedly seek approval to raise Rs 3,000 crore as a loan from two of its shareholders—Life Insurance Corporation (LIC) and State Bank of India. However, the request should be turned down. That would be the correct approach even if the company defaults on the dues of around Rs 600 crore to be repaid over the next two weeks or even the Rs 3,500 crore or so due to be repaid by March 2019.
Indeed, even as it is incomprehensible how so many insurers—led by LIC—are shareholders in the company, they should refrain from throwing it a liquidity lifeline. The stand-alone debt of over Rs 16,506 crore translates into a leverage of 3.04 times at the end of March 2018, significantly higher than the 2.23 times in March 2017. It is surprising shareholders of the company, including HDFC, SBI and LIC allowed the leverage to go up and the collapse of the Group merits a full investigation.
In the meanwhile, it is best that all banks that lend to the infrastructure player immediately classify the exposure they have to the IL&FS Group—estimated at Rs 57,000 crore—as non-performing assets (NPAs). There is always an option of writing back the exposure if the money comes in later. For instance, many banks are believed to have classified the road assets of ITNL as standard assets. However, ITNL’s financial position is particularly weak with the interest costs accounting for 90% of the ebitda. Again, not all banks have recognised the exposure to IL&FS EDC as an NPA.
While the board has cleared a rights issue for Rs 4,500 crore, at Rs 150 per share, there may be some shareholders who do not participate. In fact, it is surprising the rights issue was okayed by the board and that shareholders want to invest more in the company; SC Khuntia, chairman of the IRDAI, is believed to have suggested that insurers shouldn’t continue with investments in junk-rated paper. The best way to infuse liquidity into the cash-strapped company is to sell assets. Already, IL&FS has defaulted on loans worth Rs 350 crore to SIDBI—it has some Rs 600 crore of repayments due in the next ten days. There is little point in throwing good money after bad. In this season of scams and frauds, it is pertinent to know what exactly has happened at IL&FS.