1. Institute Of Management Development & Research, Pune
CREDIT RISK MANAGEMENT
IL&FS DEFAULT CASE
Submitted to: CA Shweta Agarwal Submitted by: Anand Kumar (21)
Pooja Mehto (25)
H J Tanvi (61)
2. IL&FS DEFAULT CASE
About the company:
IL&FS was founded in 1987 by three main financial institutions Central Bank of
India, Housing Development Finance Corporation (HDFC) and Unit Trust of India
(UTI), to provide loans for major infrastructure projects. It is a core investment
company and serves as the holding company of the IL&FS Group. The company
has implemented benchmark projects across India, from the country’s first PPP
toll bridge, to India’s longest road tunnel, built in the Himalayas. Few of its
projects include Delhi – Noida toll bridge, Ranchi- Patratu Dam road. The
company has 160 subsidiaries and four associate companies. The company has
invested heavily in roads, ports, and construction.
After a few years of formation, two big international institutions, namely
Mitsubishi (through Orix corporation Japan) and the Abu Dhabi Investment
Authority bought the shares of IL&FS. Subsequently, Life Insurance Corporation
India, Orix, and ADIA became its largest shareholders, a pattern that continues to
3. Shareholders %
IL&FS Employee 12
Central Bank Of India 7.6
What Really Happened?
Since building infrastructure became prime importance for the Indian economy,
the company tried its level best to grab numerous new projects.
In the process, it has built up a debt-to-equity ratio of 18.7. The group with 24
direct subsidiaries, 135 indirect subsidiaries, six joint ventures and four associate
Central Bank Of
Central Bank Of India
4. companies having a debt of about Rs 91,000 crore. Of this, nearly Rs 60,000 crore
of debt is at the project level, including road, power and water projects.
In July 2018, the road department of IL&FS was facing difficulty in making
repayments due on its bonds. Further, in early September 2018, one of the
subsidiaries of IL&FS Group was unable to repay a short-term loan of Rs. 1,000
crore taken from Small Industries Development Bank of India (SIDBI). Also, certain
group companies defaulted in repayments of various short and long-term
deposits, inter-corporate deposits, and commercial papers.
Consequent to defaults, rating agency ICRA downgraded the ratings of its short-
term and long-term borrowing programs. The defaults also put hundreds of
investors, banks and mutual funds associated with IL&FS under risk.
IL&FS failed continuously to service its debt and in order to eliminate the
possibility of cascading effect on financial health, the Central Government move
an application before the NCLT, Mumbai Bench. It leads to immediate suspension
of the Board of Directors on the ground of massive mismanagement of public
funds by the previous Board. Mr. Uday Kotak was appointed as the chairman of
the new Board of Directors. The new Board was tasked with the orderly
resolution of IL&FS and its group companies.
5. What led IL&FS into committing default?
❖ The new Land Acquisition Act 2013 made many of its projects unviable. The
Right to Fair Compensation and Transparency in Land Acquisition,
Rehabilitation and Resettlement Act, 2013, was passed by the Parliament
to provide increased compensation to the landowners and also provide for
compulsory rehabilitation and resettlement for the landowners and
livelihood earners from the land.
❖ The land acquisition act 2013 made the process lengthy and costly, making
it difficult for private companies who want large patches of land for
establishing their factories and manufacturing units. `
❖ IL&FS had taken a lot of project which also made difficult for them to
❖ Existence of too many subsidiaries for a non-diversified company
❖ Lack of timely action worsened the problems.
❖ Cost escalation also led to many incomplete projects
6. Credit Risk Management failure
❖ Rating agencies ICRA, CARE didn’t do its job right. They continued to give
IL&FS AAA rating. After the default in repayment by IL&FS, ICRA rated the
company with a D rating.
o The responsibility of the credit rating agency is to make aware of the
investors about the financial health of the organization by giving
different sets of ratings. In the case of IL&FS. IL&FS management
manipulated the real picture through bribing with these rating
❖ The auditors Deloitte and KPMG failed to raise the red flag on time.
o Auditors are the ones who have access to first-hand data of the
company and their sole responsibility is to raise a red flag if they see
any manipulation and error.
o The auditors knowingly did not report the true state of affairs of the
company particularly the negative net owned fund (NOF) and
negative credit adequacy ratio (CRAR),
❖ IL&FS gave a 66% increase to its management staff, and chairman Ravi
Parthasarathy gave himself a 144% increase, taking his salary to Rs 26.3
o It can be a qualitative issue where corporate governance is on stake.
Management was filling their pockets by raising their salary even
though the company was not performing well.
7. ❖ HDFC exited from the IL&FS board a year ago before the issue started even
though they had a stake of 9% in the company. They must have been
because they saw danger signs.
5 c’s Analysis of ILFS: (Assumption taken by our group)
1. Character: The character of the company is mainly decided by the credit
history of the company.
IL&FS defaulted in 2018 on the short- and long-term borrowings. So, it is
obvious that the credit repayment record is bad.
2. Capacity: Capacity measures the borrower's ability to repay a loan by
comparing income against recurring debts and assessing the borrower's
debt-to-income (DTI) ratio.
At that point of time banks were looking positive towards ILFS as they were
having a lot of projects. So, the chances of generating income were high
that will automatically boost the DTI ratio. Hence the banks and other
institutions gave loans to the IL&FS.
3. Capital: The amount of money invested by the business owner or
For this also we don’t have any data. Some of the subsidiaries pledged their
shares to take the loan.
8. 4. Collateral: Collateral gives the lender the assurance that if the borrower
defaults on the loan, the lender can get something back by repossessing the
collateral. As of 31st March 2018, ILFS had Rs.9,831.53 million as share
Here, the lands possessed, other assets like machineries etc were the
collaterals. When the company portrayed poor performance all other
future projects were not approved.
5. Conditions: The condition of your business whether it is growing or
faltering as well as what you’ll use the funds for. It also considers the state
of the economy, industry trends and how these factors might affect your
ability to repay the loan