Wrapup 1: India urges cenbank to take steps to ease liquidity, tackle credit crunch

IL&FS Engineering and Construction

25/09/2018 15:43

By Manoj Kumar and Suvashree Choudhury
    NEW DELHI/MUMBAI, Sept 25 (Reuters) - India's finance
ministry wants the central bank to consider more steps to
improve liquidity in the system, including reducing the amount
of funds banks must set aside with it, a senior ministry
official said on Tuesday, amid a bubbling credit crunch in the
Indian shadow banking industry.
    The Reserve Bank of India (RBI) could also explore buying
more bonds from the open market and open a special window for
mutual funds to inject liquidity, the official told reporters.
    Prime Minister Narendra Modi's government faces a new
challenge that could derail growth at a time when surging fuel
costs and a slumping rupee are buffeting the world's fastest
growing major economy.  urn:newsml:reuters.com:*:nD8N1VY00Q
    The RBI did not immediately respond to a request for comment
on the proposed ideas. Late on Monday the RBI said it would buy
100 billion rupees ($1.38 billion) of government bonds via an
open market operation, in a move to ease liquidity.  urn:newsml:reuters.com:*:nL4N1WA4A0
    The finance ministry, RBI and India's markets regulator have
this week all said they all are closely monitoring the liquidity
crunch that has hit non-banking financial companies (NBFC), and
they stand ready to intervene.  urn:newsml:reuters.com:*:nL4N1WA21K
    Investors have been unnerved by credit concerns that have
engulfed one of the biggest NBFC names in India - Infrastructure
Leasing & Financial Services (IL&FS)  ILFSL.UL  - which has this
month defaulted on a series of its coupon payments and seen its
debt downgraded by big rating agencies to junk from AAA, within
a span of less than two months.  urn:newsml:reuters.com:*:nL4N1WA21K
    That in turn has sparked concerns around the viability of
other NBFCs, leading to a sharp sell-off in the sector, higher
borrowing costs for NBFCs, and growing fears of contagion.
    India's Finance Minister Arun Jaitley at a press event on
Tuesday said the government was watching the IL&FS situation
closely. 
    "As far as the government is concerned, we are closely in
touch with the situation and monitoring the situation," he said,
adding banks were confident of maintaining liquidity for various
sectors as required.  urn:newsml:reuters.com:*:nD8N1VY00Z
    Earlier in the day, India's largest state-run insurer, Life
Insurance Corp (LIC), which owns some 25 percent of IL&FS, also
said it would not allow IL&FS to collapse.  urn:newsml:reuters.com:*:nD8N1VY00R
    Speaking with media on Tuesday, LIC Chairman V.K. Sharma
said all options, including increasing LIC's stake in IL&FS, are
open.
        
    MARKETS MIXED
    The reassurances from Sharma lifted shares in two of IL&FS's
biggest listed-units IL&FS Transportation Networks  ILFT.NS  and
IL&FS Engineering & Construction Co.  ILFE.NS  6.26 percent and
10 percent, respectively. 
    This coupled with government assurances helped Indian equity
markets snap a five-session losing streak and close nearly a
percent higher on Tuesday, driven by gains in banks and other
financial companies.  urn:newsml:reuters.com:*:nB8N1V800S
    The benchmark 10-year bond yield  IN071728G=CC  rose one
basis point to 8.13 percent on the day. 
    The partially convertible rupee  INR=D2   INR=IN , which is
Asia's worst performing currency so far this year, also weakened
further on the day to close at 72.7050, after slumping as low as
72.9650 per dollar early in trading on Tuesday.  urn:newsml:reuters.com:*:nL4N1WB1E3
    Despite the assurances, analysts and investors remain wary
of NBFCs and their prospects in the near-term.
    "We are cautious on NBFCs that have grown asset-liability
mismatches," warned Credit Suisse analyst Ashish Gupta in a note
to clients on Monday, adding weaker NBFCs could see net interest
margins squeezed given the rise in funding cost on the back of
tightening liquidity and widening credit spreads.
    Credit Suisse noted that yields on commercial paper issued
by NBFCs have spiked 175 basis points in the aftermath of the
IL&FS defaults. 
    The brokerage firm also estimates mutual funds currently own
an estimated 60 percent of this commercial paper and may seek to
trim their exposure in the current market environment.

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FACTBOX-India's IL&FS: its recent troubles and why investors
should care     urn:newsml:reuters.com:*:nL3N1W804S
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 (Reporting by Manoj Kumar in New Delhi and Suvashree Choudhury
in Mumbai
Additional reporting by Swati Bhat, Krishna Das and Abhirup Roy 
Writing by Euan Rocha
Editing by Richard Balmforth)
 ((euan.rocha@tr.com; +91 22 6180 7257; Reuters Messaging:
euan.rocha.reuters.com@reuters.net))