It now appears that as much as 90% of the loans advanced by IL&FS Financial Services Ltd (IFIN), the lending arm of the infrastructure conglomerate, Infrastructure Leasing and Financial Services Ltd (IL&FS) have turned bad. This again underlines the deep corruption and culpability of the previous management.
Of its loan book of Rs18,805 crore, Rs10,656 crore was lent to third-party borrowers and nearly Rs7,000 crore to group companies, N Sivaraman, chief operating officer at IL&FS group, has revealed.
According to Kaushik Modak, who now heads IFIN, the company has recovered Rs931 crore since the new board led by banker Uday Kotak took over the IL&FS Group.
According to a senior banker, before funding, the lenders are supposed to analyse qualitative and quantitative parameters and sanction the debt only if these are satisfactory. The qualitative parameters are credentials of the management and organisational team plus comprehensive risk identification and mitigation.
Bankers are also supposed to use “quantitative parameters such the borrower's ability to bring the equity - fresh or through operating cash flow, and viability - standalone and overall. The lender cannot forego this due diligence and rely on credit rating. Post-sanction, there has to be intense monitoring of the fund use during project construction and operations, thereafter,” he continued.
“All of this applies to special purpose vehicles (SPVs), setting up project or to infrastructure financing companies, which raises funds for downstream investments in SPVs. If a finance company is funding projects, it has to undertake strenuous due diligence as above,” he added.
According to him if “IFIN has bad loans of 90%, it only proves that it did not do any due diligence, worth talking about. In fact its short-term borrowing to invest in SPVs shows criminal negligence. Obviously, the banks, which financed I-FIN and IL&FS projects did absolutely no due diligence either. They blindly accepted the junk submitted by IL&FS. So the banks also cannot be absolved of the crime.”
Amazingly, mutual funds, which are supposed to channel retail investors’ money into safe debt, have put the corpus of fixed maturity plans into IL&FS related debt paper. “This is a stunning commentary of their complacency and negligence. There should be claw back on hefty packages which find managers draw,” he suggested.
Unfortunately, given the mood of elections and slow process of establishing negligence and criminality, it is unlikely that any banker will be caught in what is turning out to be one of the biggest financial scandals of India.