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The Borrowing Spree Of ILFS

As the ILFS Group threatens to collapse like a pack of cards, more and more instances of its mismanagement and reckless financial policies are coming out in the open. The spate of resignations of its top honchos, starting from its CEO of 30 years, Shri Ravi Parthasarthy is only confirming the chronic malpractices and financial mismanagement of ILFS, which engineered its collapse. It now turns out that with loans of over Rs.90000 crores, ILFS had heavily borrowed, far beyond its sustainable capacity and its failure was imminent.


Prudence is the key to good financial management and careful borrowing is its essence. A primary parameter that bankers/lenders adhere to when they lend, is to maintain a safe proportion of promoters equity versus borrowing in any project. The more the capital that a borrower invests in a project, the more is his skin in the game, which improves the viability of the project and gives safety to the lender. The chances of failure of a project where the promoters capital in the project is very low are always very high, thus putting a lender at risk. As a general tendency, borrowers prefer to invest the least in a project, which puts the lender, borrower, as well as the project at risk. The story of the failed projects in power, infrastructure and the real estate sector in India, is one where the borrower put in very little equity capital and most of the project fund came by way of loans. Such projects were doomed to fail at the very inception and they did. Moreover, in those projects where the borrower has invested little, in case of failure, the borrower becomes indifferent to the project, making it what Raghuram Rajan calls a zombie project or otherwise like in the case of Nirav Modi/Mehul Chokshi, the borrower chooses to run away.

The saga of failure of the ILFS and its shocking flock of 169 subsidiaries is also that of over borrowings. ILFS operated in the infrastructure segment, where a maximum borrowing of up to five times of borrower’s equity is considered to be safe. Any borrowing beyond that is considered to be financially dangerous. As against a safe multiple of 5 times, ILFS it turns out borrowed up to 17 times its equity. In other words, against a borrowing of Rs.90000 crore, by ILFS, its own capital was just about Rs. 5000 crores. No wonder, the entire ILFS edifice is in danger of collapse. This parlous financial mismanagement of ILFS raises serious doubts about the intent and ability of its top management, led by its founder CEO Ravi Parthsarthy, who has resigned on health grounds. It also raises questions on the conduct of the lenders, who recklessly lent to ILFS, ignoring sense and prudence. ILFS having been promoted by the likes of LIC and other institutions, operated as a quasi-government entity, with no checks and balances. But it was not so. Its top three executives were given a combined salary of Rs.47 crores last year, more than what the private sector would pay and their performance were worse than a public sector employee.

As ILFS sinks lower into a collapse, its financial mismanagement stares in the face. It calls for an investigation by agencies like SFIO, MCA etc. to find out whether such mismanagement also has angles of fraud, misfeasance and corruption to it.

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