India’s main financial regulators and its largest bank are trying to calm investors amid fears of a liquidity crisis

• On 23 September, the RBI and SEBI said that they were monitoring the situation in financial markets and would work to prevent any adverse developments.
  
• The situation in question refers to a recent plunge in stock markets owing to the selloff in debt securities of mortgage lenders DHFL and Indiabulls as well as the potential default of IL&FS.
  
• The State Bank of India (SBI), India’s largest bank, also announced that it would extend funds to NBFCs if they encountered liquidity problems.

It’s not everyday that a country’s financial watchdogs have to step in to reassure investors that a debt default crisis won’t take place. On 23 September, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) - the country’s central bank and markets regulator, respectively - issued a statement explaining that they were monitoring the situation in financial markets and would work to prevent any crises or adverse developments.

The situation in question refers to a plunge in stock markets on 21 September - owing to the selloff in debt securities of mortgage lenders Dewan Housing Finance and Indiabulls Housing Finance - and the potential default of IL&FS, the country’s largest infrastructure lender. Foreign investors have also been exiting their investments, pulling out $1 billion from bond markets in the month so far as the rupee has weakened.

The panicked selling of shares and debt instruments of non-banking financial companies (NBFCs) such as the ones mentioned above comes amid fears that they will face a liquidity shortage in the event that IL&FS defaults on its loans. The State Bank of India (SBI), India’s largest bank, announced that it would extend funds to NBFCs if they encountered liquidity problems.

Even Finance Minister Arun Jaitley weighed in this morning to ensure that the government would take appropriate action where necessary.



The IL&FS conundrum

IL&FS was recently downgraded to a “default” rating by ICRA, the Indian arm of Moody’s, after it wasn’t able to make its payments on loans from IDBI Bank and SIDBI, inter-corporate deposits and commercial paper. Its collapse will pose a problem for India’s financial markets given the fact that it owes a lot of money to domestic lenders and that its securities are held by a number of mutual funds, pension funds and insurers.

The RBI will meet the company’s shareholders this week to discuss a resolution plan. The infrastructure lender, which has total liabilities of over ₹900 billion- could see one of its major shareholders, LIC or Japan’s Orix Corp, take a majority stake ahead of a turnaround. The board of IL&FS will meet on 29 September to approve a plan to raise ₹40-₹50 billion of share capital and sell ₹200 billion worth of assets to meet its immediate debt obligations.

The Indian government will also reportedly step into facilitate the sale of IL&FS’s assets to state-owned companies so it can raise funds quickly.