Mumbai: India’s banking and markets regulators issued a rare joint statement late on Sunday, stating that they are closely monitoring the financial markets and will take appropriate steps, if required, to ensure their smooth functioning. “The Reserve Bank of India and the Securities and Exchange Board of India are closely monitoring recent developments in financial markets and are ready to take appropriate actions, if necessary," the statement said.
The regulators’ move to calm investors comes after the BSE’s benchmark Sensex crashed nearly 1,500 points on Friday over a rumoured default by mortgage lender Dewan Housing Finance Ltd (DHFL) and the uncertainty surrounding the future of Infrastructure Leasing and Financial Services Ltd (IL&FS). Shares of other home financiers also slumped following the rumours but later recouped some of their losses after DHFL denied that it had defaulted on payments.
State Bank of India chairman Rajnish Kumar also stepped in to reassure investors on Sunday, saying that there was no concern related to liquidity at mortgage lenders. Friday’s slump in the stocks of home financiers was attributed to fears of liquidity tightness and potential systemic risk arising from exposure to IL&FS.
The regulators seem to be concerned about linkages between various financial institutions in the system and whether any defaults, real or rumoured, can lead to the possibility of a systemic contagion. The intricate interlinkages in the financial system render all agents vulnerable in case of a default by a single player. This systemic risk can bring the entire financial system to a halt.
Separately, BloombergQuint reported on Sunday that a deputy governor of the Reserve Bank of India is likely to meet shareholders of IL&FS on 28 September to discuss recent defaults by the group. The agenda of the meeting will include a discussion on the capital infusion plan that the shareholders will take up on 29 September at an annual general meeting of the company, the report said.
However, no confirmation of this meeting was forthcoming when Mint made independent enquiries with SBI and the Housing Development Finance Corp. Ltd (HDFC), both shareholders of IL&FS.
The banking regulator has already initiated a special audit of IL&FS after it defaulted on its inter-corporate deposits raised from Small Industries Development Bank of India.
On Friday, Ramesh Bawa, managing director of IL&FS Investment Managers, a unit of IL&FS, resigned. On the same day, the non-banking financial company told the stock exchanges that it had defaulted on a letter of credit to IDBI Bank Ltd.
Mint reported on 21 September that the shareholders of IL&FS are working on the sale of a majority stake in its financial services unit and additional assets worth ₹ 4,500 crore to repay its debt.
IL&FS has also asked the government to clear dues worth as much as ₹ 16,000 crore for work completed by the company. IL&FS has hired SBI Capital Ltd to find an investor for a majority stake in unit IL&FS Financial Services, the report said. On 17 September, rating agency ICRA downgraded the credit rating of IL&FS to default.