IL&FS Investment Managers, a unit of India’s Infrastructure Leasing & Financial Services (IL&FS) - an Indian infrastructure development and finance company and one of the nation's largest "shadow banks" - which announced three debt defaults on Friday, said on Saturday morning its Managing Director Ramesh Bawa had resigned as managing director and chief executive officer as a management exodus begins. The company's independent directors - Renu Challu, Surinder Singh Kohli, Shubhalakshmi Panse and Uday Ved - had also submitted their resignation papers.

The company first defaulted on commercial paper, then on short-term borrowings known as inter-corporate deposits according to Bloomberg. It has also failed to pay Rs 4.5 billion ($62 million) in ICDs to government-backed lender Small Industries Development Bank of India.

As we noted on Friday, IL&FS revealed a series of three defaults on its non-convertible debt obligations and inter-corporate deposits.

With the meltdown of IL&FS in motion, another unit, IL&FS Transportation Networks, reported that its chief financial officer, Dilip Bhatia, was demoted to chief strategy officer, for the goal of divestment of assets. The regulatory filing said Bhatia would relinquish his responsibilities as CFO with immediate effect, and the company will search for a replacement.

The shockwaves spread further on Friday, when IL&FS Financial Services, another unit of the IL&FS group, said its managing director and chief executive had resigned.

Why is this important? IL&FS’s outstanding debentures and commercial paper account for 1% and 2% respectively, of India’s domestic corporate debt market as of March 31, according to Moody, while its bank loans made up about 0.5% to 0.7% of the entire banking system loans.

And while bad loans in the Italian banking system have received a ton of attention from investors, India is not far behind and India's economic recovery is built on an even shakier foundation.

According to Bloomberg, India's $1.7 trillion formal banking sector is presently struggling with $210 billion in bad loans, most of which are concentrated within its state-owned banks. During the 2018 fiscal year, growth slowed to 6.7 percent, down from the previous year's 7.1 percent, back to its levels from 2014, before Modi came to power.

IL&FS debt problems and the mountain of NPLs have already shaken confidence in the entire Indian economy, which in turn may have been among the reasons why the Indian rupee just hit a new record low.

Meanwhile, the mounting troubles at IL&FS have shaken confidence in the country's financial sector and rocked India’s stock markets on Friday. As we reported yesterday, investors jittery about the rare default in the nation’s money markets sold shares of financial companies. Dewan Housing Finance Corp. tumbled 43$, while the benchmark S&P BSE Sensex swung from a 1% gain to a decline of as much as 3$ - its wildest intraday move in more than four years - before closing with a 0.8 per cent loss.

The fear of contagion has spread beyond just the banking sector and has now increased India's sovereign risk, now at 18-month highs.