What the IL&FS Financial Crisis Taught Veteran Banker Uday Kotak, CFO News, ETCFO

“My biggest lesson as a banker and lender is that if you don’t understand something, don’t lend. If the group is complex and you don’t understand the structures, don’t rely on what the rating agencies say and also on the basis of what the auditors say. There are huge complexities in many groups,” said Uday Kotak, who took over as non-executive chairman of the crisis-ridden IL&FS and managing director and CEO of Kotak Mahindra Bank.

Kotak, who was appointed by the Ministry of Corporate Affairs to IL&FS immediately after the October 2018 crisis, will end his term next week on April 3. While IL&FS settled most of the debt, Kotak shared his experience of being at the helm during the resolution process.

Solving the IL&FS crisis

IL&FS was the biggest financial crisis involving around Rs 91,000 crore.

Kotak said that when we took over the group, we were told there were 160 companies, but we found that the total number of companies involved was 386 and the biggest question was how to manage this complex animal.

“We named the best investment bankers. But they came back and said nobody would touch it in its current form,” he said.

We first had to assess the situation of 346 companies and keep the assets on “going concern”. Going concern is a term used in auditing and finance where the challenged company is allowed to operate indefinitely until it reaches a conclusion.

“We had two board meetings a month. The question was how are we going to manage the different elements with two other important objectives. 1. Maintain “business continuity”. 2. How do we obtain a fair recovery of money for creditors and how do we ensure a fair distribution? »

Kotak also pointed out that when it comes to collection, lenders have their own strategy.

“I know in my other avatar, creditors love to fight. Creditors like to fight about their secured and unsecured status. They also try to get as far as the ailing body. and here we wanted to do what was right,” he said.

The biggest challenge was the resolution process.

“Because the concept of group resolution was absent, it’s still absent today,” said the veteran banker.

“We’ve seen many other conglomerates looking for resolution and many of them have had single-digit total percentage recovery of debt. We know those names. We were trying to figure out how to fix this problem.

What was the problem ?

Kotak explained the IL&FS model and mentioned that it was like a vision of finance for him.

“IL&FS was a five-year structure. and the base model from previous management was that operating as a special purpose vehicle (SPV) would be the project. Borrowing would be taken from banks and others against the security of projects and cash flows. And there would be additional project funding for some reason, genuine or otherwise, where the money would be poured into all of the co-structures. And the weird thing about finance that I’m still struggling with is that because it’s a new view of finance that I’ve learned over the last 3.5 years, it was the exploitation of SPVs, where the actual assets and cash flows were, were rated by rating agencies a lot lower, but the holding companies that injected unsecured (subordinated) money into these entities were AAA rated.

To handle the complex structure, we came up with the resolution framework which was approved by the NCLAT, he added.

Kotak on PSU Banks

PSU banks have suffered a severe blow in the resolution process in many important cases. But in the case of IL&FS, their underwriting credit strategy was very appropriate, Kotak says.

He said: “The PSU banks did well because they saw the cash flow and the asset.”

Kotak had also reiterated earlier that IL & FS PSU banks had a decent recovery than even many other assets.

Kotak on Makers

The important lesson Kotak says he learned is: “When we are in crisis, it is extremely important that policy makers and governments act quickly. In this case, credit goes to the government for acting quickly. We need to recognize that speed is important when we are in crisis rather than the bickering that often occurs between different policy makers. »

He also said that “the legal process should move faster and that sovereign governments, especially state governments, should respect contracts.”

He added that it was necessary to improve the resolution process of the whole group. IL&FS is a case study for the whole ecosystem to build resolutions for areas – which are no man’s land, he said

Kotak also recalled that the most important decision was to sell the iconic IL&FS building to Brookfield for Rs 1,080 crore. He was sad about it but thought it was a decision made in the adequacy of things.


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