How India Tackled the ILFS Crisis

How India Tackled the ILFS Crisis 

By Dr. Lalit Kumar Setia |  @drlalitsetia  |  drlalitsetia@gmail.com  |  Created October 26, 2018; 

Updated December 16, 2018

Whenever any company becomes sick, there are two alternatives either get it recovered by taking necessary steps or sell it to someone who is capable to manage it better than present owners. In liquidity crunch i.e. shortage of cash in the economy; every company suffers with lack of capital. In last quarter of the year 2018; the companies located in India, reported various problems due to liquidity crunch in India. The Corporate Affairs Ministry and National Companies Law Tribunal supervises the status of companies on basis of their Asset-Liability Management (ALM) position. The housing and infrastructure companies borrow through rising commercial papers and through external commercial borrowings (ECBs) to manage their working capital level which is must to meet the short-term obligations. The management of each company look for balancing their loans, maintaining sufficient liquidity, and strengthening the balance sheet. The housing and infrastructure companies are funded by banks, big corporate people, and in case any such company fails to meet its financial obligations; the sign becomes negative for all such stakeholders. In 2018, the IL&FS defaulted in making payments of its short-term loans and a crisis happened. 

IL&FS Crisis

The IL&FS crisis happened due to liquidity crisis because the company had invested money in long-term projects and required to pay the liabilities for which it had less assets to be converted into cash. The liquidity ratios i.e. Current Assets Ratio and Liquid Assets Ratio had not maintained in IL&FS which are required to be maintained in each business so that such crisis cannot be happened. Seeking loans and financing for the growth of business, is very good and must for an entity but at the same time, it is also must to maintain the short-term interest payments for servicing of the debt.

Monitoring and Control over Liquidity

In India, the monetary policies of RBI controlled the quantum of liquidity in the economy. The liquidity is monitored on daily basis and banks are directed according to the situation for maintaining the bank reserves, foreign investment flows, and growth rate of Indian economy. The income tax department asked the citizens and corporate entities to pay the advance taxes and to invest in tax-saving insturments, particularly to reduce the liquidity in Indian market. On the other hand, the financial assistance to IL&FS and banks to deal NPAs, waiving off farmers’ debt, safeguarding export-oriented companies like textile firms etc; are particularly to increase the liquidity in Indian market. With each step of increasing liquidity, it is required to keep in mind the threat of rise in inflation and with each step to decrease liquidity, it is required to keep in mind the impact on citizens and corporate entities. Further, the Cash Reserve Ratio (CRR), Statutory Reserve Ratio (SLR), Repo Rate, Reverse Repo Rate, and other tools are used by the Reserve Bank of India to contain the inflation by reducing the liquidity in Indian market.

Tackling Liquidity Crisis of IL&FS

In the crisis of IL&FS, for safeguarding the whole economy by continuing the works of infrastructural development, the RBI intervened on directions of the central government to tackle the liquidity crisis. Due to this crisis, government paid more interests to small saving investors and increased the burden of interest payments. The threat of financial instability also be seen by various economists to alert the Indian government only due to such intervention. It is must to improve the cash supply to reduce the defaults of corporate entities and it is also necessary to control the liquidity to contain the inflation.

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