Repeat of 2008-type liquidity measure to revive IL&FS unlikely. Read why

Banks have expressed unwillingness to extend a 2008-type liquidity measure to help the non-banking or mutual fund sectors, but the Centre and the Reserve 

Bank of India (RBI) may bring out other kind of special liquidity measures to bail out IL&FS, said people in the know.

The special liquidity measures could even be announced before IL&FS’s board meet on September 29. “The government and RBI are aware that letting IL&FS fail will have a cascading effect on bond holders and there would be a series of defaults from others too. They want the contagion to stop from spreading,” said one of the persons. 

However, the already frail banking system won’t be strained further to execute measures, the person added. 

In October 2008, the RBI had cut banks’ cash reserve ratio by 100 basis points and allowed banks to avail an extra 0.5 per cent of their deposit base from the RBI’s liquidity window to help the mutual fund industry. 

For non-banking financial companies (NBFCs) this time, banks have told the RBI that they won’t be interested in buying NBFC papers, considering the huge mark-to-market losses on their bond portfolio. 

The government and the central bank are unlikely to push banks much, but having termed IL&FS a “systematically important” NBFC, they will bring out special measures soon — the shareholders of IL&FS have been told by the management.

One of the measures being discussed is instructing the National Highway Authority of India (NHAI) to pay up the Rs170 billion in dues to IL&FS. 

This alone will solve all problems of IL&FS, the management has told shareholders. However, the IL&FS management has not been assured yet that any such prodding to the NHAI will be done, a person in knowledge of the matter said. 

The IL&FS management met shareholders in separate meetings at their head office, on Wednesday. 

State Bank of India (SBI) and Life Insurance Corporation of India (LIC) have also been assured that any rights issue of IL&FS would be done in a manner that shareholders won’t be at a loss. 

Importantly, the management has also told shareholders that IL&FS was discussing its liquidity crisis with the Centre and the RBI for a long time, much before the crisis came to public light. 

The company was also assured that it would get support should there be any crisis. 

However, IL&FS and its subsidiaries defaulted on their payment obligation on inter-corporate deposits and commercial paper, in late August, triggering a sell-off in NBFC stocks.