Mounting debt at many large non-bank financial companies is slowing business growth and putting the country's financial system at risk.
A lack of funds in India's $42-billion shadow banking system is leaving borrowers unable to secure funding and leading to a slowdown in the world's second-fastest growing major economy while putting the financial system at risk.
Lending from non-bank financial companies (NBFCs), which specialize in small loans, have fallen 30 percent in the year to the end of March, according to India’s Finance Industry Development Council, «Financial Times» reported.
NBFCs, which number some 10,000, have played an important role in supporting India's growth, providing up to one-fifth of all new credit in the past decade, according to the central bank, «Financial Times» reported. But the liquidity squeeze and perception of higher risk means that businesses are finding it hard to secure loans, and gross domestic product growth has slowed to its lowest level in five years.
Mounting Difficulties
Troubles have been multiplying since the default of infrastructure financier Infrastructure Leasing & Financial Services (IL&FS), one of India’s largest nonbank lenders, last year.
The basic business model of NBFCs, which has become unsustainable, is to use short-term funding sources such as commercial paper to raise funds that they then lend for longer-term projects, such as home and automobile loans and property developers.
In May, the country's central bank issued guidelines stipulating a bank-like liquidity coverage ratio for NBFCs, including granular asset-liability management and closer monitoring. But many say this is not enough, calling for the government to take over poor performing NBFCs. Business leaders are also hoping the country's budget, which will be presented on Friday, will include measures for injecting liquidity into the struggling system.
