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Shadow Banks Show Signs of Recovery as India Economy Rebounds

The fortunes of NBFCs have been improving amid early signs that India is rebounding from an unprecedented recession.

Shadow Banks Show Signs of Recovery as India Economy Rebounds
An employee counts Indian rupee banknotes inside jewellery store  in Mumbai, India (Photographer Dhiraj Singh/Bloomberg)

The fortunes of India’s shadow lenders have been improving amid early signs Asia’s third-largest economy is rebounding from an unprecedented recession.

Two of four indicators compiled by Bloomberg that reflect the state of shadow banks strengthened last month from October. Shares of such firms that are part of the benchmark S&P BSE 500 index jumped two levels higher. The financiers also trimmed their debt piles, helping a gauge measuring their total outstanding debt burden to improve.

Shadow Banks Show Signs of Recovery as India Economy Rebounds

A stronger shadow banking industry, which has been struggling since a crisis in 2018 when a large financier unexpectedly defaulted, is key to helping staunch further trouble in the economy. The lenders provide funds to those that banks can’t reach, including some in the poorest strata. In a sign of its continued concern about the sector, the central bank said Friday that it would introduce risk-based internal audits at large non-bank finance companies.

India already suffered one of the worst contractions among major nations due to pandemic lockdowns. Gross domestic product declined 7.5% last quarter from a year ago. While the big picture remains challenging, that marked improvement from a record 24% contraction the previous quarter.

In November, Prime Minister Narendra Modi’s government increased stimulus steps, which included a one-year moratorium on loans for certain smaller businesses.

Still, global rating companies have stepped up warnings. Moody’s Investors Service last month said bad loans will probably increase at non-bank finance firms once authorities withdraw support handed during the pandemic, while S&P Global Ratings warned that there is more stress ahead for the nation’s financial institutions.

The Bloomberg check-up of the sector’s health also showed that:

  • Banking system liquidity remained buoyant
  • Average spreads on the lenders’ AAA rated five-year bonds fell for a second month in November to the lowest level in five years

The scores attached to each of the indicators have been calculated by Bloomberg by normalizing the deviation of the latest value of the indicator from its yearly average. They are assigned on a scale of 1 to 7, with 1 implying weakness and 7 showing strength.

©2020 Bloomberg L.P.