New York University student Michael Weissman pauses to tie his shoe in New York’s Greenwich Village. (Photographer: Jennifer Altman/Bloomberg News)

The IL&FS Effect: Indian Financiers Brace for Tighter Regulation

(Bloomberg) -- Shares of Indian non-bank financiers plunged on concern the fastest pace of growth since 2013 is at risk of foundering.

Dewan Housing Finance Corp., JM Financial Ltd. and Edelweiss Financial Services Ltd. are among non-bank lenders that slumped more than 15 percent as of 2:40 p.m. in Mumbai on Monday. A spate of money market defaults by Infrastructure Leasing & Financial Services Ltd. has put the spotlight on the 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.

“For some of the smaller NBFCs there is going to be no option to survive,” Neelkanth Mishra, strategist at Credit Suisse Group AG in Mumbai said in an interview with BloombergQuint. “The good thing is that, systemically it doesn’t matter. It hurts those firms, which is fine.”

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.

©2018 Bloomberg L.P.