CAN a big financial firm's credit rating fall from AAA one month—good enough for pension funds and life insurers—to junk the next without causing a crash?
India's government decided it did not want to find out. Last week it granted Infrastructure Leasing and Financial Services (IL&FS),
one of India's biggest shadow banks, a parachute. Plenty are worrying that it will not be enough.
As recently as early September, IL&FS raised few concerns. A couple of weeks later it had defaulted on several payments to creditors.
By the end of the month it had said it would raise 45bn rupees ($630m) of fresh capital through a rights issue from its owners,
including the Life Insurance Corporation of India, a state-owned insurer.
On October 1st the government forced out the board and appointed a new one. It was, in effect, a shadow-bank bail-out.
IL&FS is a very Indian beast. It was founded in 1987, with the support of state owned banks, to provide finance to local governments for infrastructure.
It has grown into a vast conglomerate, with 169 group companies.
It finances, builds and runs everything from toll roads to "smart cities", not just in India but abroad.
Though it is private, the projects it runs, and the roughly 40% of its equity that is owned by nationalised firms,
make it what Indian analysts call "quasi-sovereign". If it went bust, projects across the country would stall, leaving taxpayers on the hook.
As India's state-owned banks have sought to repair their ropy balance-sheets,
IL&FS, which lends but does not take deposits, grew to satisfy demand for infrastructure finance.
Its own debt nearly doubled from 2014 to 2018, to 910bn rupees. It used to borrow mainly from banks.
Recently it has turned to the corporate-bond market. More than a third of its debt falls due within 12 months, up from a fifth a year ago.
The problem is that most of its assets are long-term, illiquid projects. This year interest due overtook operating profit; hence the cash crunch.