The sound health of shadow banks is vital because they form the
backbone of the Indian economy in lending to a wide range of borrowers from
small merchants to business giants.
The fortunes of
India’s shadow lenders are showing signs of turning, suggesting stimulus
measures from policy makers will help the troubled sector weather some of the
fallout from the pandemic.
Premiums that investors seek to buy AAA rated five-year bonds of non-bank
lenders over similar-maturity government notes narrowed the most last month
since at least 2012, helping a gauge measuring bond spreads to strengthen. A
custom index of shares of 20 financial firms and other companies also improved.
Strengthening
Signals
Investors seek
lower premiums to buy shadow bank bonds amid buoyant liquidity
The sound health
of shadow
banks is vital because they form the backbone of the Indian economy in
lending to a wide range of borrowers from small merchants to business giants.
Support for these financiers is essential for Prime Minister Narendra Modi as
he seeks to revive lending and support economic growth, which is forecast to
shrink this year for the first time in four decades.
The government in
mid-May announced Rs 3 trillion ($40 billion) of collateral-free loans to the
nation’s small businesses and a 750 billion rupee special credit line to
non-bank financiers. In its latest move last week, the Reserve Bank of India
provided 100 billion rupees of special liquidity to organizations that fund
mortgage lenders and housing finance companies, and permitted banks to
restructure some loans.
Despite an
improvement in the sector’s health, which was hit by a credit crunch since 2018
when a large infrastructure financier defaulted, there are lingering concerns
among investors. Many are worried that the financial impact of the pandemic on
companies has been masked by central bank’s deferral on loan repayments for
individuals and businesses.
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