IL&FS: Contagion is off the table but it doesn't mean the saga is over

India’s shock seizure of a troubled shadow bank on Monday means contagion’s off the table. It doesn’t mean the saga’s over.

That’s the verdict of strategists and investors after Prime Minister Narendra Modi’s government took control of Infrastructure Leasing & Financial Services Ltd., promising to end the group’s string of defaults.

But the giant IL&FS group still owns long-term infrastructure financed with short-term funding, and its new board will need to make progress selling assets to pare $12.6 billion of debt. Getting it right is key for India to avoid further financial sector angst, which the nation hardly needs as it grapples with surging bond yields and a record-low rupee.

The government’s move on IL&FS is “a step in the right direction and will calm investor nerves to some extent," said Lakshmi Iyer, chief investment officer of debt at Mumbai-based Kotak Mahindra Asset Management Co. In terms of ending the contagion risk for good, “a lot of that will depend on the new management’s plans to turn the company around.”