IL&FS imbroglio

The near crash of IL&FS and reported/estimated loss of ₹91,000 crore to this long-term lending institution is a clear indication that we have not learnt anything from the Lehman Brothers crisis in 2008. The crisis at that time rose because the banks and various other financial institutions did not follow the prudent lending norms and lent to sub prime assets and in the bargain many crooks ran away with honest people’s money. It almost took near about a decade to bring back the world economy to some semblance of normalcy and now we are facing yet another crisis of gigantic proportions which could throw the world economy in an abyss. We in India should try to find out the reasons for this mess in various banks and financial institutions. These reasons are lack of accountability of the bankers, unscrupulous business men who are out to loot the banks , nexus between politicians and dishonest businessmen and above all the systemic failure due to negligence of RBI and other regulatory bodies. It is time all the statutory bodies are taken to task and should be made more accountable and answerable to the public.

Kolkata

With reference to the Editorial ‘Surgical strike’ (October 3),thankfully the IL&FS crisis did not play havoc with direct public investment. But the company has done far more harm, unlike Satyam that had misappropriated funds, in effecting huge transfers within scores of listed and unlisted financial entities. To this extent it was a desi Lehman tale. And it had its consequences akin to a falling house of cards. The market was suddenly drained of asset values and more crucially of faith. We may yet prop up the company but neither IL&FS as a financial entity nor its sponsors can erase the scar it would leave on the economy and reputation of Indian markets.

Rating agencies have proved once again that they lack fore-warning capacities and their ratings are purely based on past data published. The various debt instruments of IL&FS Financial Services (IFIN) were rated AAA and its CP programme was accorded A1+ by CARE ratings on March 27. After analysing the financials of March 2018 of the same company where income was stagnant, NPAs were up, PAT was down by more than 50 per cent, RoA was down by 63 bps to 0.49, the same rating agency reduced the rating by a single notch to AA on August 16 for the debt instruments and reaffirmed A1+ for CP. This is after taking into account the RBI inspection report on divergence in group exposure practices adopted by IFIN and the huge amount to be raised as equity for complying with RBI observations. The explanation given for downgrading in rating by just one notch is classic. The parentage of IL&FS, group synergies, strong risk management and comfortable liquidity were quoted as the strong points in deciding the rating. Un-utilised working capital and undrawn bank limits were cited to the comfortable liquidity. Within a fortnight after the rating, IFIN defaulted in meeting a CP liability, which was termed by the rating agency as ‘technical’ in its report on September 4. If that was technical, why was the company barred from raising CP for six months? When the company again defaulted, the ratings were revised to BB (below investment grade) on September 9 and to D (Default) on September 17. Does not the rating agency owe an explanation to investors as to how the assumptions under which liquidity was termed as comfortable have changed within two weeks? In addition to arriving at a rating based on group consolidation and synergy factors, is it not liable to advise the rating on a stand alone basis without these factors? The same strategy is adopted by the rating agencies in respect of PSBs citing availability of Sovereign Guarantee.

At least the financials of PSBs are discussed in the public domain. It is time to inspect the rating methodologies of the rating agencies in India.

Coimbatore

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