IL&FS Crisis 2018
The IL&FS crisis of 2018 erupted when Infrastructure Leasing and Financial Services defaulted on short-term debt obligations, triggering a liquidity freeze across India's NBFC sector and revealing the systemic risks of opaque group structures in infrastructure finance.
Infrastructure Leasing and Financial Services, or IL&FS, was a systemically important NBFC that financed large infrastructure projects across roads, power, and urban utilities. The group had grown into a conglomerate of over 300 subsidiaries and associates, financed primarily through short-term commercial paper and non-convertible debentures even as its assets were long-gestation infrastructure projects. This asset-liability mismatch, sustained during a period of easy liquidity, became fatal when credit markets tightened in 2018.
In September 2018, IL&FS defaulted on inter-corporate deposits and commercial paper obligations — events that credit rating agencies had failed to anticipate, having rated IL&FS instruments at the highest investment grade just months before the defaults. The revelation triggered a crisis of confidence. Mutual funds holding IL&FS paper faced redemption pressure, which in turn caused them to sell other NBFC and housing finance company paper to meet outflows. This contagion effect caused the cost of borrowing for all NBFCs to spike sharply.
Housing finance companies such as Dewan Housing Finance Corporation (DHFL) and smaller NBFCs that depended on short-term market borrowings experienced acute funding stress. The crisis exposed the structural vulnerability of entities that borrowed short to lend long without adequate liquidity buffers. Stock prices of NBFCs and housing finance companies fell sharply across October and November 2018.
The government intervened by superseding the IL&FS board and appointing a new board under veteran banker Uday Kotak to undertake an orderly resolution. The Insolvency and Bankruptcy Code's provisions were applied to several IL&FS group entities. Resolution proceeded slowly given the complexity of over 300 entities across multiple jurisdictions.
The crisis prompted the RBI to tighten liquidity and leverage norms for NBFCs, introduced a scale-based regulation framework, mandated minimum liquid asset requirements, and required NBFCs above certain asset thresholds to maintain liquidity coverage ratios akin to banks. SEBI tightened the rules around credit rating methodologies and mandated more frequent surveillance of rated instruments. The IL&FS crisis served as the starting point of a broader NBFC deleveraging cycle that took several years to fully normalise.