India’s financial sector regulators and the government waited and waited patiently, long enough for the Infrastructure Leasing and Financial Services (IL&FS) mess to develop, evolve and finally trigger a chain reaction leading to a market carnage. Finally, they made the grand entry to the stage and proclaimed to the world that this is how the cookie crumbled.
A joint statement from the Reserve Bank of India (RBI) and stock market regulators late last week and a subsequent reassurance from Union finance minister Arun Jaitley made it clear what is on the cards for IL&FS--a large scale bail-out that will involve truckloads of cash and set a big precedent for other aspiring bail-out candidates to opt for the same channel.
Now that a bail-out is agreed upon, the question is, who will do the dirty job. After all, we are talking about a mammoth institution that has liabilities close to a lakh crore and 169 subsidiaries, whose credit ratings are hammered by every reputed agency making it almost impossible for the firm to raise further funds.
At this point, someone at the North Block must have thought of India’s perpetual milch cow mooing at its backyard. The bail-out hotline, infamously installed in the corner office of LIC must have rung. A statement was issued by the LIC chairman that IL&FS will be bailed out at any cost and all options are open. That statement worked to offer some relief to the markets resulting in a bounce in IL&FS and other NBFC stocks. Good news so far.
But, what is LIC after all? An insurance company, not an investment company. And where did it get this huge treasure to bail out all the dying institutions-- from the common people who entrusted their money with LIC hoping that it will deploy the money prudently and stays healthy enough to settle their claims when their health fails, or when they die.
Now, the question is whether the LIC is using its investment prudently and if its investments make sense. Already, LIC holds a tad above 25 percent stake in IL&FS and is the largest shareholder followed by nearly 24 percent stake by Orix Corp.
A bail-out would mean LIC inching closer to a significant controlling stake in the troubled company. By which investment principle does this decision makes sense to an insurance company? One reason why the IRDA has set investment limits for insurance companies in different companies is to safeguard customers’money. But, it has been partial to LIC and has diluted this requirement for it in the past including when the insurer was asked to take over IDBI bank, another crisis-ridden entity. Where is the fair play in the game?
By pushing LIC to bail out IL&FS, where issues are far deeper than a one time bail-out package, the government is taking the common policyholders who have entrusted their money with the LIC for granted. The IL&FS issue is too complex and widespread for LIC to own up. It’s not just the liquidity crisis; the entity has been struggling with major cost overruns as infrastructure projects are getting delayed on account of a slowing economy, rising borrowing costs, banking sector risk aversion and generally large investors’ lacking trust in emerging markets.
With most papers are rated low, raising funds and repaying existing liabilities are getting even more trickier for IL&FS. Over the last for years, the debt burden of ILFS has nearly doubled.
As a financial investment, the IL&FS stake might have made sense to LIC at some point. But the question is, what expertise does LIC have to don the role of a controlling shareholder in such a large infrastructure firm that is facing a severe crisis?
This was the same case with LIC’s IDBI acquisition too. The bank is already under the prompt corrective action (PCA) plan of the RBI on account of financial ill-health. In the fourth quarter of fiscal 2017-18, IDBI Bank's net loss widened to Rs 5,662.76 crore as a higher provisioning for non-performing assets (NPAs) hurt its bottom line. Gross NPAs rose to 27.95 percent of its loans at the end of March 2018, compared with 21.25 percent at the end of March 2017. In absolute terms, gross bad loans stood at Rs 55,588.26 crore as against Rs 44,752.59 crore on 31 March 2017. Provisioning for NPAs has raised to Rs 10,773.30 crore in the fourth quarter of the fiscal ended March 2018, up from the Rs 6,054.39 crore parked aside in the year-ago period. Despite all this, LIC loved IDBI.
Make no mistake, LIC is moving away from its original mandate and is now sailing in dangerous waters. It is not that all is fine with its business. It has seen market share falling steadily from 75.44 percent in March 2014 to 67.32 percent in March 2018. It should ask why policyholders are moving away from the trusted brand to private firms.
IL&FS bail-out makes sense, given the interconnectedness of the company in the financial system (it is a lender and borrower at the same time) and the so-called systemic importance. But, there are other ways to save IL&FS. It’s second largest shareholder, Orix corporation has already expressed an interest to bail it out. IL&FS can also look at selling all its non-core assets to free up the much-needed survival capital.
India’s infrastructure financing is a major mess with majority of the lenders caught in a tight asset-liability mismatch. Multiple factors are at play blocking a clearly drawn long-term policy for infrastructure development. Ironically, banks aren’t meant to do long-term infrastructure financing but they are drawn into the mess. The corporate bond market is too shallow to service the infra sector. These are fundamental problems that need to be addressed. Asking LIC to bail-out failing institutions is a panic reaction. But, if IL&FS is bailed out, most likely this won’t be the last such rescue. Other companies too will join the queue hoping that government will rescue the floppers. IL&FS is better to be allowed to fail than get an LIC- sponsored bail out. After all, it’s the policyholders' money that is being gambled here.
Updated Date: Sep 26, 2018 11:30 AM