Government's rescue of debt-ridden IL&FS may spell major losses for lenders

New Delhi/Mumbai: India`s move to take control of debt-laden Infrastructure Leasing and Financial Services (IL&FS) will only succeed if lenders agree to take substantial losses, government sources familiar with the discussions told Reuters.

The federal government on Monday replaced the board of IL&FS, a major infrastructure financing and construction firm, after its failure to honour debt obligations sent shockwaves through Indian financial markets.

The beleaguered company`s debt pile had grown to more than 900 billion rupees ($12.33 billion) as it rode a lending boom among so-called non-bank financial companies (NBFCs), or the shadow banking sector, which manage an aggregate loan book of nearly $300 billion.

But IL&FS had compromised on corporate governance and risk management norms, the government told the company law tribunal on Monday as it explained why it intended to take over the firm.

The new six-member IL&FS board will prepare a revival plan, but it is becoming clear some of its lenders will need to suffer major losses, one finance ministry official said.

"It may be difficult to save it (IL&FS) unless the lenders agree to take substantial haircuts," said the official, who declined to be identified due to the sensitivity of the matter.

The official added that there had been no discussions with the company`s lenders, among them India`s largest bank, the State Bank of India, and state-owned lenders, such as Bank of India and Punjab National Bank.

A second government source echoed those views, saying IL&FS needed nearly 150 billion rupees ($2 billion) in financial support to avert a collapse and could only be saved if lenders agreed to take a big haircut.

The IL&FS fallout has already roiled stock markets and the government has scrambled to contain further damage that could undermine confidence in the financial sector.

A credit crunch in financial markets also does not bode well for Prime Minister Narendra Modi, who is already facing a growing backlash over rising fuel prices, a falling rupee currency and farmer protests over low crop prices months before he seeks a second term at an election due by next May.

The government has said IL&FS was presenting a "rosy picture and camouflaging" its financial statements, but still wants to ensure adequate liquidity for it to avoid further defaults.

One of the government sources, however, cautioned that more defaults cannot be ruled out, as IL&FS needs to repay more than 250 billion rupees by March 2019.

India`s parliamentary panel on finance on Wednesday decided to investigate the IL&FS matter and its members will visit Mumbai this month to meet the new board, a source with direct knowledge of the deliberations said.

They will also talk to finance ministry officials, the source added.

Separately, India`s Serious Fraud Investigation Office (SFIO) has launched an inquiry into alleged financial irregularities at IL&FS, questioning its top management and searching its offices, the Economic Times newspaper said.

Reuters could not immediately reach SFIO officials to seek comment.