LIC and SBI allowed IL&FS to happen: ex RBI gov YV Reddy

MUMBAI: Former RBI governor YV Reddy blamed two public sector behemoths - LIC of India and the State Bank of India - for the collapse of Infrastructure Leasing & Financial Services, which triggered a crisis among non-banking finance companies grappling with a cash squeeze.

“RBI should be concerned at the risk-assessment capabilities of public sector giants like LIC and SBI that allowed this to happen while having large stakes in IL&FS,” Reddy said while delivering a speech at the Gokhale Institute of Politics and Economics in Pune. “If IL&FS faced a liquidity problem, it would have been the responsibility of RBI.”

IL&FS began to default on repayments in September amid allegations of mismanagement. LIC, the largest shareholder, held more than a 25% stake in the group, while SBI owned about 6.5%. The government reconstituted the company’s board in October.


“Perhaps the government intervened since both LIC and SBI, owned by it, are large stakeholders in IL&FS and also because many infrastructure projects are involved,” Reddy said.

Investors panicked, resulting in a spurt in the borrowing costs of para banks. A secondary market trade kicked off fear mongering. DSP Mutual Fund sold Dewan Housing Finance bonds as high as 11%.

The extent of the RBI’s response to the liquidity conditions faced by non-banking financial companies is another point of friction between the government and the RBI, said Reddy, who was appointed the 21st Governor of the RBI in September 2003.