NEW DELHI: The hard-earned money and savings of several thousands of salaried citizens—in the form of provident fund and pension funds—are likely to sink along with the sinking Infrastructure Leasing & Financial Services (IL&FS) and its group companies, faced with a debt burden of Rs 91,000 crore.
A report in the Economic Times published on January 16, 2019 said analysts estimate that employees’ provident funds and pension funds between Rs 15,000 crore and Rs 20,000 crore have been invested in the IL&FS holding company and its group companies.
Provident and pension funds are government-backed savings and hence traditionally considered reliable and risk-free—and might even be the only form of savings that many salaried people have.
But these provident and pension funds had invested in the failed conglomerate, either owning bonds or providing loans. In fact, before the infrastructure lender’s massive liquidity crisis spilled out in the open, the bonds of IL&FS had been rate ‘AAA’ by credit rating agencies, signifying sound creditworthiness and potential of higher returns.
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While the precise figures as to how much losses these provident and pension funds face was not available due to the “very opaque nature of these funds”, said ET, experts say the losses could be as high as Rs 20,000 crore “after providing for holdings by others, such as banks, mutual funds and other wealth management schemes”.
The report said UBS analysts have estimated that lenders may have to take haircuts ranging from Rs 11,300 crore to Rs 28,500 crore.
Of the total debt burden of Rs 91,000 crore, 61% is in bank loans and 33% is in debentures and commercial papers, regulatory filings show, according to ET.
Among banks that have high exposure are Punjab National Bank, IndusInd Bank, Bank of Baroda and Yes Bank. But there was not enough data to figure out “which provident, pension funds own how much of the junk debt paper”, said the report.
“Provident funds are now estimated to be holding 40% of total bond IL&FS group outstanding,” said an investment banker quoted anonymously byET.
IL&FS reportedly had declined to comment on this news.
The conglomerate had been financing and operating many of the country’s largest infrastructure projects, in public-private partnerships.
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The loan default, which is still unfolding, is likely to have a domino effect that threatens to drown the country’s banks and debt market (mutual funds, pension funds, insurance companies, etc.) into a financial crisis of a scale as yet unknown and likely unprecedented.
An unlisted holding company, the IL&FS Ltd is the parent corporation to at least 24 direct subsidiaries, 135 indirect subsidiaries, four associate companies and six joint ventures.
Indeed, the extent of the exposure in the market to the bad debt of IL&FS is not even clear yet.
The likely impact of the impending massive loan default has even been compared to the collapse of Lehman Brothers, which triggered the 2008 global financial crisis.
By now, it has been established that the IL&FS disaster is not only a matter of corporate misgovernance and mismanagement, but a case of fraud, cronyism, and complete lack of accountability and transparency.
Among other misdemeanours that came to light in the aftermath of the IL&FS debacle, it was pointed out that the total remuneration for senior management (including salary and other benefits) had risen disproportionately between financial years 2013-14 and 2017-18, a period during which the group’s fortunes were clearly plummeting.
But even as the IL&FS saga still unfolds, the question is, why should the lifetime savings of employees be lost to a case of corporate fraud, and who should the employees of the country hold accountable?