Recovery pressure on MFs a key concern as IL&FS crisis rattles market

Possible redemption pressure on mutual funds and a scenario where 1,500 smaller NBFCs might face cancellation of licences due to inadequate capital were among the major concerns as the IL&FS crisis began to roil financial markets.

These were among the factors highlighted by the corporate affairs ministry as it moved the National Company Law Tribunal (NCLT) seeking change in management of the crisis-hit IL&FS.

Citing a confidential note, dated September 30, from the Department of Economic Affairs, the ministry in its plea said there was a deep concern about possible collapse of the group and its impact on the economy.
 

As per the note, there could be redemption pressure on asset management companies having Rs 28 billion worth exposure to IL&FS bonds from "corporate clients who have invested in this Rs 16 trillion debt MF industry", as per the petition filed by the ministry.

Another concern was that in the wake of the IL&FS crisis, "as many as 1,500 smaller NBFCs may have their licences cancelled because these don't have adequate capital", it added.

Following debt defaults by some group entities of IL&FS, there have been fears of liquidity crisis in the financial markets, promoting authorities, including the RBI, to emphasise that measures would be taken to ensure adequate liquidity in the system.

In only the second instance in nearly a decade, the government has superseded the management of IL&FS where state-owned LIC is a major shareholder.

The NCLT, on Monday, approved the government's request seeking change in management. A similar move was done in 2009 when the accounting scam came to light at Satyam Computer Services, then a leading software exporter.

On Monday, the government said the leverage of IL&FS Group is "very high" and that it is involved in many infrastructure projects, including through equity and debt financing.

"Any impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector, financial markets and the economy, considering its systemically important nature.

"The government stands fully committed to ensure that needed liquidity is arranged for the IL&FS from the financial system so that no more defaults take place and the infrastructure projects are implemented smoothly," it had said in a release.

As per its latest balance sheet, IL&FS Group has infrastructure and financial assets exceeding Rs 1,150 billion and is presently facing tremendous debt pressure and struggling to service around Rs 910 billion in debt.