IL&FS' lenders to feel heat of defaults in Q2

PSB executives said loans to group holding company IL&FS and entities might still be treated as “standard”.

Lenders, especially public sector banks (PSBs) and institutions with exposure (loans and debt) worth Rs 57,000 crore to Infrastructure Leasing and Financial Services (IL&FS), will feel the heat of defaults in this financial year’s second quarter ended September.

They might have to set aside additional capital for default grade loans and for mark-to-market (recalculating assets at current values) provisioning for erosion in the value of bonds of IL&FS group entities.

PSB executives said loans to group holding company IL&FS and entities might still be treated as “standard”.

But, the risk weight for loan exposure will rise sharply from 20 per cent (for AAA-rates ones) to over 100 per cent for default (grade 'D').

Given the Rs 13,000-crore loan exposure to the holding entity, the capital to be set aside for default grade loans will go up by Rs 1,000 crore.

This would have a marginal impact on the capital adequacy ratio, varying among lenders, bankers said.

Loans will be treated as non-performing assets (NPAs) only when they stay overdue continuously for 90 days. As for IL&FS group entities, most loan exposure is standard and the issue about NPA and provisioning might arise for third quarter results.

A top executive with a Mumbai-based PSB said those who hold paper like bonds in the treasury book will see the impact in the second quarter.

When the rating is default grade, obviously the yield on bonds has gone up (the price has eroded). “There is no escape from it”.

In early August, loans and non-convertible debentures (NCDs) of IL&FS were carrying an 'AAA' rating.

With a series of delays in repayment, rating agencies effected multi-notch downgrades and finally brought the rating down to 'D' by the middle of September.

The consolidated debt of IL&FS rose to Rs 91,090 crore in 2018, from Rs 48,670 crore in 2014.

Interest outgo rose to Rs 7,920 crore in this period, from Rs 3,970 crore.

By 2018, the company had not even been making enough profit to take care of its interest expense, leading to the default.

Of the Rs 91,090 crore debt obligation, Rs 57,000 crore was from PSBs.

On Monday, the Union finance ministry said the series of defaults by IL&FS group companies in August and September on deposits, commercial papers and non-convertible debentures, and the rating downgrades resulted in massive effects in the financial markets.

It caused redemption pressure on mutual funds which held such financial instruments.

Photograph: francis Mascarenhas/Reuters