Rising liquidity issues in ILFS credit negative for Indian banks: Moody's

New Delhi: Moody's Investors Service on Wednesday said rising liquidity issues in ILFS, which has recently defaulted on repayment of Rs 100 crore, are credit negative for Indian banks.

The debts incurred by ILFS in the form of bank loans accounted for around 0.5-0.7 per cent of overall banking system loans as on March 31, 2018.

"Rising liquidity issues in ILFS are credit negative for Indian banks... We do not expect the exposure of any rated bank to exceed 2 per cent of its loan book," Moody's said in a note on the impact of liquidity issues at the infrastructure company on Indian banks and debt markets.

Infrastructure Leasing & Finance Services (ILFS) defaulted on a repayment of Rs 100 crore to the Small Industries Development Bank of India (SIDBI) on September 10, 2018.

This followed a series of defaults starting August 28, 2018, when ILFS Financial Services, one of ILFS' subsidiaries, delayed repayment of some of its commercial paper obligations. ILFS Financial Services has since been barred from accessing the commercial paper market until February 2019, Moody's said.

"One particular asset challenge for banks in a potential ILFS default comes from the company's complex corporate structure, which could result in high variation of ultimate losses across banks depending on where the banks' specific exposures lie," it said.

The US-based rating agency said ILFS has a complicated structure, with the holding company at the top owning stakes in its financial services arm as well as in multiple subsidiary companies that operate its infrastructure assets.

For instance, ILFS Transportation Network, which is the entity holding the group's transportation assets, was involved in 37 projects at the end of March 2018. These projects include a mix of operating assets, and those still under construction. Most of these projects are housed under separate subsidiaries.

"This implies that the eventual losses suffered by creditor banks in a default scenario could vary significantly and depend on the particular assets lodged within specific subsidiaries. A bank that lends to a subsidiary with a mature operating asset with stable cash flows will be in a better position than a bank that lends to one with assets under construction," Moody's said.

The group's repayment risks will remain significant because of the weakening of its credit metrics. Over the last decade, debt in the group has increased significantly on account of considerable investments in new infrastructure ventures, it added.

"Aside from their direct loan exposure, banks are also vulnerable to an ILFS default through the potential impact on India's domestic debt markets. As of March 31, ILFS had outstanding debentures and commercial papers, which accounted for 1 per cent and 2 per cent, respectively, of India's domestic corporate debt market," Moody's said.