The IL&FS group is facing serious liquidity crisis and has defaulted on interest payments on various debt repayments since 27 August.Reuters

The investigative agencies have swung into action in the IL&FS crisis; the Serious Fraud Investigation Office (SFIO) will investigate whether the loans which were proceeded to Infrastructure Leasing & Financial Services were diverted for other purposes.

Additionally, the SFIO will also probe whether the creditors had evaluated its borrowing requirements properly.

The Economic Times quoted one of its officials "We need to find out whether all due diligence was done before sanctioning of such credit. Also, if the firm used some of this amount to retire old debt."

The official also added that the possibility of the banks approving the loans to IL&FS without carrying out proper assessment can also not be ruled out. The banks could have relied only on the rating provided by the credit rating agencies. The IL&FS for a long period of time was rated as AAA, the highest possible rating by many of these agencies.

Notably, the government-owned Small Industries Development Bank of India (SIDBI) is one of the companies to which IL&FS had defaulted. It had initiated an internal disciplinary investigation against its own chief general manager in the risk management department.

Another government official said that banks also need to be investigated to find whether they continued giving loans to the company even after being aware of its financial problems. 

"There are reports which state that the debt of the firm touched Rs 91,000 crore, of which one third was bank loans. Was there indiscriminate lending?" an official argued.

Based on the public information on the company, A Kotak Institutional Equities report revealed that the Bank of India has the biggest exposure of Rs. 2,388 crore to the beleaguered IL&FS. followed by State Bank of India and Punjab National Bank with Rs 2,140 crore and Rs 1,859 crore of exposure respectively. Yes Bank was the largest private sector creditor to the IL&FS with an amount of Rs. 1,841 crore.

The government argued that the debt stress was evident in the company and its main subsidiaries for many years but it was covered by misrepresentation of facts.