PE funds bet big on crisis-hit NBFCs even as other investors balk

The funds have invested about $2 billion this year in the country's non-bank financing sector, which is worth some $40 billion.

Business Standard : Private equity funds are picking through the rubble of India’s crisis-stricken shadow banking sector, even as other investors balk.

The funds have invested about $2 billion this year in the country’s non-bank financing sector, which is worth some $40 billion. While that’s not enough to staunch the 16-month long cash crunch following the collapse of IL&FS Group, it is 50 per cent higher than the average over the last four years and comes after a strong 2018, according to data from research firm Venture Intelligence.

Investing in India’s shadow banks involves some serious risks. Slowing economic growth could drag more financiers into default. Altico Capital India Ltd., whose shareholders include Fiera Capital and Varde Partners, missed debt payments in September. The head of KKR & Co.’s lending business in India resigned last month amid rising defaults in the sector.

There’s also concern liquidations could spread after major shadow lender Dewan Housing Finance Corp. was seized by authorities last week. Apollo Capital and Cerberus are eyeing a stake in Dewan Housing, the Economic Times reported, citing an unidentified person familiar with the development.

But signs suggest private equity interest remains strong. PE adviser Vidura Capital is working on fundraising for six non-bank lenders, while Spark Capital Advisors India Pvt. is helping five, representatives for the firms said.

Other types of investors have gotten cold feet.

Mutual funds, which have been an important source of funds, cut their exposure to shadow bank bonds to the lowest in five years in October, Securities and Exchange Board of India data show.

The share of money from insurers as part of NBFCs’ total funding has also declined to the lowest in at least two years, according to Reserve Bank of India data.

Shadow banking is not a sector where anything you pick is good, said Skanda Jayaraman, managing director for investment banking at Spark Capital Advisors India, which last month advised Aptus Value Housing Finance India Ltd. on an equity raise. Still, “it’s a great time for private equity players to look at NBFCs as the valuations can be attractive.”

NBFCs focused on financing micro-, small- and medium-sized firms have seen significant interest from private equity funds, according to Arpan Sheth, a partner at Bain & Co.

IMF says India's growth 'much weaker' than expected; cuts FY20 projection

The economic growth slowed to a seven-year low to 5 per cent in April to June quarter from 8 per cent a year ago, as per the government data.

International Monetary Fund (IMF) on Thursday said that India's economic growth is "much weaker" than expected due to corporate and environmental regulatory uncertainty and "lingering weakness" in some non-Bank financial companies.

"Again, we will have a fresh set of numbers coming up but the recent economic growth in India is much weaker than expected, mainly due to corporate and environmental regulatory uncertainty and lingering weakness in some non-Bank financial companies and risks to the outlook are tilted to the downside, as we like to say," IMF spokesman Gerry Rice told reporters at a news conference.

The economic growth slowed to a seven-year low to 5 per cent in April to June quarter from 8 per cent a year ago, as per the government data.

The International Monetary Fund (IMF) has cut its projection for India's economic growth by 0.3 percentage points to 7 per cent for the fiscal year 2019-20 owing to the "weaker-than-expected outlook" for the domestic demand.

The growth is expected to rise to 7.2 per cent points in FY21, down by the projected growth rate of 7.5 in the earlier report.

The slowdown was largely due to a sharp dip in the manufacturing sector and agriculture output, said the Ministry of Statistics and Programme Implementation in a statement.

The previous low was recorded at 4.9 per cent in April to June 2012-13. Consumer demand and private investment have weakened amid global trade frictions and dampening business sentiment.

Business Standard

Bond bonanza to help Indian banks battle world's worst bad loan ratio

The windfall treasury profits come as a relief for lenders staring at a potential surge in bad loan provisions due to a slowing economy and a cash squeeze in the nation's shadow banking system.

One of Asia's best bond rallies is bolstering Indian banks' efforts to accelerate clean-up of the world's worst bad-loan pile.

The benchmark 10-year sovereign bond yield dropped about 50 basis points in July, extending the past year's decline to more than 130 basis points. Each basis point fall in the yield adds Rs 3.5 billion ($50 million) to banks' treasury gains, boosting their ability to writedown bad loans, estimates by ICRA Ltd show.

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The windfall treasury profits come as a relief for lenders staring at a potential surge in bad loan provisions due to a slowing economy and a cash squeeze in the nation's shadow banking system. India's proposal last month to issue the country's first overseas bond and bets on deep cuts in policy rates are adding fresh legs to the bond rally.

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This may not be the first time a bond bonanza helped India clean up bad debt in its financial system. Two decades back, when the soured-debt ratio at banks was hovering close to 15 per cent, yields on government securities fell sharply, generating mark-to-market gains that came handy in cleaning out the bad debt pile, Romesh Sobti, chief executive officer at IndusInd Bank, said in a recent interview.

"While this time around the drop in the sovereign bond yields is not as dramatic, the quantum of bond holding is way higher," Sobti said. "Gains will be handsome enough to enable banks to start cleaning up the books faster."

Credit markets are already cognizant of this bond boon. The average cost of credit-default swaps insuring the bonds of five Indian lenders against nonpayment for five-years has dropped 35 basis points last month, according to data provider CMAI. This has been the sharpest drop in about five years.

Adding further to the optimism is the government's plan to infuse Rs 700 billion into state-run banks in the year to March 31 to strengthen their balance sheets and kick-start the nation's economic expansion. The pace of economic growth slowed for an eighth consecutive month year-on-year in June, according to Bloomberg Economics.

"Public-sector banks as a sector can emerge from the red behind lower provisions and potentially better trading-related gains," said Ismael Pili, co-head for Asian bank research at CreditSights Singapore. "

More NBFCs will have to die if India's shadow-banking sector is to survive

A few quarters of pain in sectors that depend upon shadow financing is a small price to pay to produce a sector that winds up doing its job efficiently and sustainably.

Business Standard : The slowdown that began among India's shadow banks is spreading. Sectors that had come to depend on credit from what in India are called non-banking financial companies (NBFCs) are posting awful numbers. Insurance is slowing and real estate is troubled. The automobile sector -- which contributes half of India's manufacturing output -- is shrinking as stressed shadow banks prioritise survival above lending growth.

Naturally, Prime Minister Narendra Modi's government is worried. But it, and the Reserve Bank of India, should avoid any attempt to succor the shadow-banking sector with liquidity. Giving NBFCs the false appearance of health would only increase, not decrease the chances of a systemic crisis.

Speaking to Bloomberg News recently, RBI Governor Shaktikanta Das warned that the central bank sees "some signs of fragility," particularly in shadow banks that are exposed to the housing sector. The question is what to do about it. On the one hand, Das sought to reassure investors that the RBI would prevent another large NBFC from collapsing. (The current crisis was set off when highly connected Infrastructure Leasing & Financial Services Ltd defaulted last year.) On the other hand, he said, "If NBFCs have undertaken certain governance practice and certain ways of function and they have to a price for it, they will have to pay a price for it."

If those two statements don't quite seem to go together, that's because Indian policymakers and businesses are split over the right course of action. Many executives, and some ruling-party politicians concerned about growth, would like to see the sector bailed out. Anil Ambani, a tycoon with a large stake in financial services, has said that NBFCs are in intensive care and, "in the ICU, if you want to save the patient, what is needed is not Paracetamol but full life support."

But many regulators correctly doubt that's the best strategy. Shadow banks have come to occupy a space in the Indian economy for which they weren't built. Some of them gorged on money raised from the public -- from state-owned banks or debt mutual funds -- to lend to long-tenure projects, some of them in politically exposed sectors such as real estate or infrastructure.

NBFCs filled this niche by default: The government is short of money, there is no real corporate debt market in India, and the traditional banking system was burdened with bad loans.

Funding crisis to worsen unless India pumps more cash into financial system

Muted government spending and high election-linked expenditure have created a cash deficit in India's banking system in the past few months.

Business Standard : India needs to pump more cash into its financial system to prevent a worsening of the funding crisis among shadow banks and the corporate sector, according to one of the nation’s biggest money managers.

Non-banking financial companies had served as a “surrogate womb” for banks, who face regulatory limits on how much they can lend, but that “surrogacy has stopped,’’ Lakshmi Iyer, chief investment officer for debt at Kotak Mahindra Asset Management Co., said in an interview at her office in Mumbai. “If the liquidity the system requires is not provided sooner or later, this could morph itself into something beyond NBFCs.’’

The non-bank lenders, which have been hit by high borrowing costs and largely shut out from the bond market after the crisis at shadow lender IL&FS Group broke out last year, are facing the risk that more borrowers will be unable to repay their debt as the cash crunch drags on. Oil industry firms, steel producers and mineral companies, all of which rely on NBFCs for funding, are finding it difficult to raise money, Iyer said.

Muted government spending and high election-linked expenditure have created a cash deficit in India’s banking system in the past few months. Authorities are already using open-market debt purchase operations and currency swaps as a “potent liquidity tool,” but more is needed to get enough cash into the system, Iyer said.

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India’s cash deficit, measured by how much lenders need to borrow from the central bank to carry out their operations, is the worst since 2016, according to data compiled by Bloomberg. The banking system has experienced a liquidity deficit for all but 10 days so far in 2019, the data show.

Policy makers appear to be aware of the potential risks. The nation’s top bureaucrat for corporate affairs, Injeti Srinivas, warned of an imminent crisis in NBFCs due to over-leveraging and a credit squeeze among other reasons, and those are “a perfect recipe for disaster,” the Press Trust of India reported.

The troubles have hit borrowers reliant on non-bank lenders for financing, such as property developers. In an industry group letter to India’s finance minister, real estate companies complained that some lenders are delaying loan disbursals and raising interest rates arbitrarily.