India’s shadow banking sector shaken up
Shadow lenders need to tackle asset-liability mismatch
India’s burgeoning shadow finance sector is likely to face a shake-up after defaults at one major lender battered the nation’s financial markets in the past week and reinforced worries about credit risk.
Industry officials and experts say they expect Indian regulators to cancel the licences of as many as 1,500 smaller nonbanking finance companies because they don’t have adequate capital, and to also make it more difficult for new applicants to get approval.
The Reserve Bank of India (RBI), which has been tightening rules for non-banking financial companies (NBFCs), did not respond to requests for comment.
Better capitalised and more conservatively run finance firms are likely to swallow up an increasing number of smaller rivals, the experts said. That could make it difficult for many small borrowers to get loans, especially in the countryside where two-thirds of India’s 1.3 billion people live, and put the brakes on a surge in private consumption with a knock-on effect on growth.
Infrastructure Financing and Leasing Services Ltd (IL&FS), a major infrastructure financing and construction company, sent shock waves through the NBFC sector when it defaulted on some of its debt obligations in recent weeks.
Then last Friday, a large fund manager sold short-term bonds issued by home loan provider Dewan Housing Finance at a sharp discount, raising fears of wider liquidity problems.
Cause for concern
“The way things are unfolding, there is certainly cause for concern and the sector could see consolidation,” said Harun Rashid Khan, a former deputy governor at the RBI and now a non-executive chairman at Bandhan Bank Ltd, formerly a microfinance company specialising in small-value loans.
“The whole issue is they have to take care of their asset-liability mismatch,” Khan said in reference to concerns that some of the firms have borrowed short-term when their revenue streams are longer-term.
The spotlight has now been turned on thousands of “highrisk” small players dominating lending in villages and towns.
The shadow banking sector now comprises more than 11,400 firms with a combined balance-sheet worth Rs22.1 trillion (Dh1.1 trillion), and is less strictly regulated than banks. It has been attracting new investors, particularly as the nation’s banks have had to slow their lending.