The government and RBI has recognized the need for prompt action to stop credit markets from freezing on IL&FS default. The government announced with immediate effect a new board for IL&FS to be headed by noted banker Uday Kotak for IL&FS to get some credibility from lenders. This should clam fears of banks who have huge exposure to IL&FS credit.
RBI is providing liquidity to markets through government bond purchases. Read our note on RBI to buy over Rs 1 trillion of bonds through OMOs.
The government and RBI may also look at the mechanism they used in 2009 to make sure NBFCs funding needs were not cut. The mechansim helped calm markets even though it was used only for a very small insignificant amount as interest rates were high for the loans and the loans were not to be used for business expansion.
RBI cannot by statute buy any other bonds apart from central government bonds. They can only indirectly intervene to calm markets.
In February 2009,The Government of India had announced an arrangement for providing liquidity support to meet the temporary liquidity mismatches for eligible Non-Banking Financial Companies-Non-Deposit Taking-Systemically Important (NBFC-ND-SI) through a Special Purpose Vehicle (SPV). The scheme had been finalised and Industrial Development Bank of India Stressed Asset Stabilisation Fund (IDBI SASF) Trust had been notified as Special Purpose Vehicle for undertaking this operation.
The Reserve Bank of India had purchased securities issued by the SPV guaranteed by the Government of India for aggregated amount of Rs.200 billion. The SPV purchased the short term paper from the issuing NBFCs directly. The short term instruments included Commercial Papers and Non-convertible Debentures, with residual maturity not more than 90 days and rated as investment grade. Initially,The facility was not available for any paper issued after 31st March,2009. Eligible NBFCs-ND-SI had approached the SPV- IDBI SASF Trust for considering their request for purchase of short term paper.
Industrial Development Bank of India Stressed Asset Stabilisation Fund (IDBI SASF) Trust, which was notified as a special purpose vehicle (SPV) for undertaking the operation, was extended for eligible papers issued by NBFCs up to 30th September,2009. The SPV ceaseed to make fresh purchases after 31st December,2009 and needed to recover all dues by 31st March,2010. The facility was availed of to the extent of Rs.750 crore and was repaid fully by July 7, 2009.