Moody’s Investor Services, on Wednesday, said rising liquidity worries at ailing Infrastructure Leasing and Financial Services (IL&FS) are credit-negative for banks and the debt market.

“The group’s repayment risks will remain significant because of the weakening of its credit metrics,” the report said, adding that IL&FS’ infrastructure business is a root cause of its current distress.

The company defaulted on a repayment of ₹100 crore to the Small Industries Development Bank of India (SIDBI) on September 10, 2018.

This followed a series of defaults starting August 28, 2018, when ILFS Financial Services, one of ILFS’ subsidiaries, delayed repayment of some of its commercial paper obligations. ILFS Financial Services has since been barred from accessing the commercial paper market until February 2019, Moody’s said.

“One particular asset challenge for banks in a potential IL&FS default comes from the company’s complex corporate structure, which could result in high variation of ultimate losses across banks depending on where the banks’ specific exposures lie,” it said.

Further, IL&FS has a complicated structure, with the holding company at the top owning stakes in its financial services arm as well as in multiple subsidiary companies that operate its infrastructure assets.

As of March 31, 2018, debts incurred by IL&FS in the form of bank loans accounted for around 0.5 per cent to 0.7 per cent of the overall banking system loans, Moody’s said in its report. “We do not expect the exposure of any rated bank to exceed two per cent of its loan book,” it added.

Its outstanding debentures and commercial papers as on March 31 accounted for 1 per cent and 2 per cent of India’s domestic corporate debt market, Moody’s said.

It, however, said that the risk of a contagion is mitigated by our assessment that the underlying solvency issues, which have led to the liquidity issues, are idiosyncratic to ILFS and are not prevalent in the finance companies sector.

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