India: IL&FS saga sets stage for tighter regulations for non-bank financiers

Photo: Reuters

The fastest pace of growth since 2013 at India’s non-bank financiers is about to come to a grinding halt.

A spate of money market defaults by Infrastructure Leasing & Financial Services Ltd. has put the spotlight on non-bank finance companies. With banks struggling with bad loans and low capital buffers, non-bank lenders had rushed to tap demand for long-term financing to build roads, power plants and homes. But these lenders borrowed from the short-term money markets to finance long-term loans, raising the risk of defaults should cash flows take a hit.

The central bank last week warned stricter regulations are in the offing to ward off default risks rising from the so-called asset liability mismatch. Depending on short-term debt to garner a bigger share of the South Asian nation’s lending market is a “myopic strategy,” Reserve Bank of India Deputy Governor Viral Acharya said in a briefing on Friday. The regulator is looking at strengthening guidelines for non-bank lenders to avoid “rollover risks,” Deputy Governor NS Vishwanathan said.

Borrowing rates in India’s money markets climbed to a four-year high this month following IL&FS’s defaults. Non-bank lenders have been hit by the rise in funding costs and by caution among mutual funds in buying more of their debt. Stricter rules at a juncture when funding is becoming difficult may force smaller NBFCs to shut.

As investors focus on non-bank financiers “it is creating incentives for bond fund managers to not buy NBFC paper,” Neelkanth Mishra, strategist at Credit Suisse Group AG in Mumbai said in an interview with BloombergQuint. “For some of the smaller NBFCs there is going to be no option to survive. The good thing is that, systemically it doesn’t matter. It hurts those firms, which is fine.”

Fears of rising costs and tougher regulations led to a selloff in non-bank finance companies on Monday. Edelweiss Financial Services Ltd., IIFL Holdings Ltd. and Magma Fincorp Ltd. slumped more than eight percent in Mumbai trading on Monday. Analysts are concerned they may fall further.

Non-bank finance companies expanded their assets by an average 18 percent over the past year, according to data compiled by Bloomberg. IL&FS, a huge borrower, accounted for 2 percent of outstanding commercial paper, 1 percent of debentures and as much as 0.7 percent of banking system loans. It amassed debt of $12.6 billion as of March 31. Defaults at the company cased panic in the market prompting the government to seize control of the lender last week.

“Firms will need to raise retail bonds to maintain the growth rates but there would be an increase in the cost of funds,” said Umesh Revankar, managing director at Shriram Transport Finance Co., adding that his company focuses on retail and long-term funds.

Non-bank financiers, atleast 248 of which are considered systemically important by RBI, say the crisis has hit them at a very inopportune time. Borrowings rise as India enters into the busy festival and wedding season in October. Buyers of homes, vehicles and even farm and factory equipment may slow purchases. This could also pose challenges to Prime Minister Narendra Modi’s efforts to bolster the economy and create more jobs before he seeks re-election next year.

“My worst fear is prolonged doubts and impression on this sector may increase borrowing and lending rates, that too during the festive period,” Shriram’s Revankar said. It will slow down the economy, he said.

Also Read:

India: Debt-ridden IL&FS saw spate of top-level exits way ahead of crisis

IL&FS new board mulls various options to revive debt-laden entity

Bloomberg

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.