The great clean-up act in NBFCs will have to begin right away

India could be going through its own Lehman Brothers moment that rattled US markets and triggered a financial turmoil a decade ago. Government officials, the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) and State Bank of India (SBI) have rushed to assure investors by saying India was nowhere near such a crisis, though non-banking finance companies (NBFCs) led by Infrastructure Leasing & Financial Services (IL&FS) have spooked the market in the last few days.

Not just IL&FS, most other NBFCs too were dragged down, shaving off Rs 8.48 lakh crore investor wealth till Tuesday. In some cases, where the market feared huge asset liability mismatch, the rout in share values was a humungous 80 per cent.

Financial Chronicle front-paged a story detailing the web of companies, joint ventures, and associates and stepped down subsidiaries totalling 187, which seem to have piled up over Rs 91,091.30 crore debt. The group seems to have run out of cash as it is struggling to repay – and a couple of IL&FS companies have already defaulted.

LIC, SBI and Central Bank of India (CBI) that together control over 40 per cent stake in IL&FS have swung into action to stave off a crisis and save the financial markets from the stranglehold of a bear hug. Deewan Housing Finance’s (DHFL) reported defaults have only added to the woes of the market with NBFCs like HDFC and Bajaj Finance taking the heat.

Market developments apart, the key issue is how to bail out IL&FS that is considered a systematically important investment company with projects worth $25 billion. Should the troika of LIC, SBI and CBI bail out the maze of companies that fall under the IL&FS umbrella? Or will IL&FS go the IDBI Bank way and come into LIC nest? There are no easy answers to these questions while the IL&FS saga continues to unfold over a couple of weeks. LIC is becoming a sort of go-to entity to pick up companies that have few tangible assets. A forensic audit of IL&FS’ quality of assets will determine how deep the malaise has spread given that several foreign and domestic JVs involving contractors of road projects have sprung up over the years.

Finance ministry officials have hinted that the government was willing to bail out IL&FS that also has over a million small investors in 3 of its listed companies. But th­en, it is undecided who should take the bla­me for its failure. It is pertinent to ask how LIC, SBI and CBI allowed the NBFC to deteriorate with hardly any ch­e­c­ks and balances in place. Regulators like RBI and Sebi appeared not to have noticed when IL&FS over-leveraged its balance sheet, siphoned off funds and bu­r­nt a big hole in the system?

As in the case of Satyam Computers of S. Ramalinga Raju, reports suggest financial balance sheets of several IL&FS companies have apparently been cooked to present a rosy picture. If that were true, then how do auditors – both internal and external – absolve themselves of the responsibility? Given the IL&FS experience, the regulators will have to quickly scrutinise balance sheets and accounts of all NBFCs to understand the governance standards and financial health. It was only in July this year that LIC realised the mess that IL&FS had landed itself in. That was when LIC managing director Hemant Bhargava was co-opted to IL&FC as non-executive chairman to keep a close watch on its affairs. The great clean-up act in NBFCs will have to begin right away. About that there can be little doubt.