It’s hard to identify a system-wide implosion, much less be able to call one. But India may currently be having its own “Lehman Brothers Moment.”

India’s Lehman Brothers is Infrastructure Leasing & Financial Services (IL&FS), a massive “shadow lender” to infrastructure projects across the country. Almost exactly a decade after the global financial crisis that Lehman’s crash triggered.

Why Lehman? Well, there are three stark similarities that also mirror as fundamental differences.

Debt, ratings and credit rating agencies.

Let’s start with debt. The defining term of the 2008-era subprime bubble was collateralised debt obligations (CDOs) – complex debt instruments packaged with individual fixed income assets. CDOs were sliced and diced ad infinitum till nobody knew what they contained or what they were worth. These CDOs, which were then sold across the world to banks, mutual funds, pension funds, and insurance companies, turned out to be junk. Which then set off a chain reaction pushing the entire global economy into recession.

In IL&FS’ case, debt is still the reason. The labyrinthine group with 347 different subsidiaries had total consolidated borrowings of Rs 91,000 crore (~$12.5 billion) as of March this year. Out of this Rs 24,297 crore (~$3.3 billion) (26.35%) was raised through debentures and around Rs 5,752 crore (~$785 million) (6.3%) through commercial paper (CP), as per a report by brokerage firm Nomura. Needless to say, many banking and financial institutions in India have lent to IL&FS.

In debt

As of 31 March 2018, the outstanding debentures and CPs of IL&FS accounted for 1% and 2%, respectively, of India's domestic corporate debt market, as per a report by Moody’s.

Number two is ratings.

CDOs enjoyed super safe AAA ratings until companies started to file for bankruptcy, after which they went toxic and were conveniently reduced to default grade.

IL&FS enjoyed a AAA credit rating as late as August 2018. But after the crisis started to get talked about, the ratings started to fall. Ratings firm ICRA Ltd first decided to drop its rating by a level to AA+. Then, in September, ICRA and others like Fitch Ratings and CARE Ratings downgraded it to default after the parent and a host of subsidiaries defaulted.

Which brings us to the third similarity – credit rating agencies, or CRAs – essential gatekeepers of the financial ecosystem, who were caught napping.

The string of defaults by IL&FS and the sudden downgrade by rating agencies have created a panic in the Indian capital market and cast doubt on the credibility of rating agencies’ work. “Beginning from the failures from the 2008-09 crisis and the current scenario of IL&FS and two years back with office equipment company Ricoh India, all these are living examples of the message that rating agencies are not serving the purpose for which they were created,” says JN Gupta, former Executive Director of Securities and Exchange Board of India (Sebi) and MD of proxy advisory firm Stakeholder Empowerment Services.

AUTHOR

Sidhartha Shukla

In his earlier stint at Moneycontrol, the website owned by the Network18 group, Sid wrote on cryptocurrencies, cybersecurity, business, and finance. Born in Raipur, Chhattisgarh, Sid has spent most of his life in Jalandhar, Punjab. He has a BSc in Mathematics from St Xavier’s College, Mumbai. Sid is a comic book nerd and a big fan of Alan Moore, Neil Gaiman and Brian Azzarello. He can be reached at sidhartha at the rate the-ken.com

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