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Govt's rescue of IL&FS to succeed only if lenders take big haircut: Sources

The new six-member IL&FS board will prepare a revival plan, but it is becoming clear some of its lenders will need to suffer major losses, a finance ministry official said

Manoj Kumar & Promit Mukherjee | Reuters  |  New Delhi/Mumbai 


The government's move to take control of debt-laden (IL&FS) will only succeed if lenders agree to take substantial losses, sources said.

The Centre on Monday replaced the board of IL&FS, a major infrastructure financing and construction firm, after its failure to honour debt obligations sent shockwaves through the financial markets. The beleaguered company's debt pile had grown to more than Rs900 billion ($12.33 billion) as it rode a lending boom among (NBFCs), or the shadow banking sector, which manage an aggregate loan book of nearly $300 billion. But had compromised on corporate governance and risk management norms, the government told the company law tribunal on Monday as it explained why it intended to take over the firm. The new six-member board will prepare a revival plan, but it is becoming clear some of its lenders will need to suffer major losses, one ministry said. "It may be difficult to save it (IL&FS) unless the lenders agree to take substantial haircuts," said the official, who declined to be identified due to the sensitivity of the matter. The added that there had been no discussions with the company's lenders, among them India's largest bank, the State Bank of India, and state-owned lenders, such as and A second government source echoed those views, saying needed nearly Rs 150 billion ($2 billion) in financial support to avert a collapse and could only be saved if lenders agreed to take a big haircut.

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The IL&FS fallout has already roiled stock markets and the government has scrambled to contain further damage that could undermine confidence in the financial sector. A crunch in financial markets also does not bode well for Narendra Modi, who is already facing a growing backlash over rising fuel prices, a falling rupee currency and protests over low crop prices months before he seeks a second term at an election due by next May. The government has said IL&FS was presenting a "rosy picture and camouflaging" its financial statements, but still wants to ensure adequate liquidity for it to avoid further defaults. One of the government sources, however, cautioned that more defaults cannot be ruled out, as IL&FS needs to repay more than Rs 250 billion by March 2019. India's parliamentary panel on on Wednesday decided to investigate the IL&FS matter and its members will visit this month to meet the new board, a source with direct knowledge of the deliberations said. They will also talk to ministry officials, the source added. Separately, India's (SFIO) has launched an inquiry into alleged financial irregularities at IL&FS, questioning its top management and searching its offices, newspaper said. could not immediately reach SFIO officials to seek comment.

First Published: Wed, October 03 2018. 14:58 IST