Stung by the cash crunch, India's top shadow banks find respite overseas

The industry has been reeling from a crisis triggered by the shock collapse of financier IL&FS Group last year, which has been followed by more failures.

As India’s shadow banks continue to feel the sting from a cash crunch, a handful of the safest ones are actually finding a bit of respite as their overseas borrowing costs decline.

The industry has been reeling from a crisis triggered by the shock collapse of financier IL&FS Group last year, which has been followed by more failures.

But yield-starved international investors are increasingly lending to the strongest financiers, betting government steps to shore up the industry will staunch broader contagion. The government needs a healthier shadow banking sector as it tries to boost the slowest economic growth in six years.

Average coupons on foreign-currency bonds of shadow banks fell to 4.66 per cent in 2019, from a record high of 5.32 per cent in 2018.

Accessing the offshore debt markets will help the lenders as they try to meet rupee and overseas bond redemptions that are set to jump to an all-time high of $60 billion next year.

A record $4.5 billion equivalent of offshore bonds was sold by six non-bank financial companies year-to-date, compared with $1.8 billion overall in 2018. Another lender, Manappuram Finance Ltd., started a roadshow last week for three-year dollar notes.

Business Standard

How a potential $5 bn DHFL write-off can worsen the shadow bank crisis

The potential write-off would place an additional burden on Indian banks already struggling with $130 billion of bad loans, one of the highest levels in the world.

India’s surprise seizure of a troubled shadow bank won’t end the woes of its lenders, faced with the risk of heavy writeoffs if Dewan Housing Finance Corp. is declared a fraudulent account.

That’s because the Reserve Bank of India requires banks to provision fully for their entire exposure over four quarters if they decide a loan account involves fraud. The decision on Dewan will be based on a final report by the international accountancy firm KPMG on the firm’s lending practices, which is due to be submitted soon, according to bankers with knowledge of the matter, who asked not to be identified further.

An interim KPMG study of Dewan’s books earlier this year cited anomalies including 165 billion rupees of loans to entities connected to the company’s founders, equivalent to just under half of the banks’ total exposure of 380 billion rupees ($5.3 billion) to the shadow lender.

“If Dewan is tagged as a fraud account that will create significant additional provisioning requirement and will further dent the profits of banks,” said Mitul Budhbhatti, the head of financial institutions at CARE Ratings Ltd.

A total writeoff would counter some of the optimism about efforts to contain the shadow banking crisis sparked by the Reserve Bank of India’s Wednesday move to remove Dewan’s management and initiate bankruptcy procedures. It would place an additional burden on Indian banks already struggling with $130 billion of bad loans, one of the highest levels in the world.

Only about 55 billion rupees of provisions would be required if the KPMG report absolves Dewan of irregular lending, Budhbhatti said.

Dewan has been struggling to repay its loans as the spreading shadow banking crisis has shut off new credit to the sector. The company’s shares are down more than 90% so far this year.

Business Standard

How some financiers are benefiting from India's shadow banking crisis

Many shadow lenders have been effectively shut out of the nation's credit market as the more than 15-month-old banking crisis raises investor wariness about the financiers' ability to refinance debt.

As the shakeout in India’s credit market shows few signs of abating, one group of financiers is benefiting from the turmoil: shadow banks that provide loans in exchange for gold.

In a country deeply attached to the precious metal, whose people stockpile more gold than citizens of any other country, borrowers are increasingly pawning their family jewelry to get cash amid a fundraising crunch.

That’s helped double the share price in the past year of Manappuram Finance Ltd, one such firm, while the stock of Muthoot Finance Ltd, the country’s largest cash-for-gold lender, has jumped 47%. Those financiers’ bonds are also in demand at a time when investors are shunning debt from other shadow banks, which are struggling from lack of funds and credit downgrades.

More than half of the loans from these lenders get repaid in less than six months, providing firms with a steady stream of cash to pay off their own debt and thus avoiding a so-called asset-liability mismatch. The recent rise in gold prices is also a boon. Indian households have almost $1 trillion worth of gold, and the nation is the biggest buyer of the metal after China.

“Shorter tenure of our loans helps to keep a check on asset-liability mismatches while a rise in the gold prices will help in keeping a check on asset quality too,” said V P Nandakumar, the chief executive officer of Manappuram Finance, in an interview. “Both equity and credit markets are looking favorably at non-bank lenders with robust business models who have got both these pieces right.”

Many shadow lenders have been effectively shut out of the nation’s credit market as the more than 15-month-old banking crisis raises investor wariness about the financiers’ ability to refinance debt. Lenders including Dewan Housing Finance Corp and Altico Capital India Ltd, which have been using short-term debt to fund long-term loans they extended, have defaulted in 2019, adding to the risk-off sentiment in local markets.

Cash-for-gold lenders face risks of their own. A major one is the price of the metal. While gold has gained this year, if it reverses course and falls steeply that could hurt the companies’ asset quality and business, according to rating firm ICRA.

Business Standard

Shadow bank woes may continue to haunt stock market after disrupting rally

The S&P BSE Sensex Index posted its third day of losses on Tuesday, ending a surge since the Sept 20 announcement of the tax cuts.

Business Standard : India’s shadow banking crisis has sucked in more financial firms this week, eroding a stock market rally that’s been driven by a surprise $20 billion tax cut package.

The S&P BSE Sensex Index posted its third day of losses on Tuesday, ending a surge since the Sept. 20 announcement of the tax cuts. Financial stocks, which account for 45 per cent of the benchmark index, contributed the most to the declines since late last week, according to data compiled by Bloomberg.

Debt concerns at lenders including Indiabulls Housing Finance Ltd. and a co-operative bank, and worries a cleanup in corporate debt could be prolonged, have spooked the financial markets. The sight of depositors lining up to pull their money from Punjab & Maharashtra Co-operative Bank Ltd., after the central bank put limits on lending, has also been unsettling.

The Reserve Bank of India on Friday tweeted the “banking system is safe and stable and there is no need to panic.” The nation’s stock markets will reopen Thursday after a one-day holiday.

Banking Troubles

Punjab & Maharashtra Co-operative Bank concealed large exposures from RBI since 2008, a former managing director said

Central bank put restrictions on Lakshmi Vilas Bank Ltd., which Indiabulls Housing plans to acquire

Yes Bank Ltd.’s shares plunged almost 34 per cent in two days on concerns a cleanup in corporate debt could drag on

Here is what the analysts are saying:

Stay Selective

Negative news flow around lenders has “overshadowed the recent tax cut tailwind, bringing focus back on sector issues: liquidity issues and contagion risks,” Jefferies Financial Group Inc. analysts including Bhaskar Basu wrote in a note on Tuesday.

Basu said he likes non-bank lenders with a strong liability base, low asset quality risks and good earnings visibility. He prefers stocks including Bajaj Finance Ltd. and Mahindra & Mahindra Financial Services Ltd.

Can a land bank be the solution to India's huge shadow bank crisis?

India's banks are rapidly losing faith in the shadow financiers that lend to property builders.

When a well-capitalized shadow bank’s credit rating goes from A+ to D in 10 days, it shows how fragile lending to India’s builders has become. It also highlights the policy error of not addressing the root of the problem: land.

In June, three months before the unexpected default by Altico Capital India Ltd., I proposed a land bank that would buy stalled property projects from struggling developers. The bank would pay with government-backed debt securities, which the builders would use to repay loans.

To see how this could prevent liquidity problems from cascading into solvency issues, consider the Altico default. The Clearwater Capital Partners-backed firm missed a measly $2.8 million interest payment after its tight but manageable repayment schedule of $135 million became a squeeze at $233 million in the financial year that started April 1. The 63 cents of equity behind every dollar Altico owed to its creditors was of little help. Spooked by its $900 million-plus loan book for residential and commercial real-estate projects, two lenders exercised put options or reset the interest rates so high that they had to be prepaid.

India’s banks are rapidly losing faith in the shadow financiers that lend to property builders. A year after the collapse of IL&FS Group, a specialist infrastructure financier, the crisis of confidence is getting worse. Indiabulls Housing Finance Ltd. shares fell as much 38% on Monday after the central bank imposed lending restrictions on Lakshmi Vilas Bank Ltd., a deposit-taking institution the financier has been trying to merge with to bolster its funding sources.

The nervousness with shadow banks isn’t about the quality of their retail loans, which are still fairly resilient. It’s their lumpy advances that are worrying investors. Dewan Housing Finance Corp., which defaulted in June, underwrites mortgages, but it also has $5 billion of exposure to developers. As banks try to restructure Dewan, a contentious issue is the haircut they’ll have to take if the lender is forced to sell its builder loan book at a deep discount.

Business Standard

A bank's race against crisis has served a warning to Indian banking

At more than $200 billion, India's world-beating pile of bad loans is bigger than Italy's.

Business Standard : India’s fragile financial system is swinging between despair and hope. Two separate incidents — both featuring the lender YES Bank Ltd — recently underscored the drag of past underwriting follies as well as the lift from a digital reset. It will take time, but good things will come to Indian banking as a result of the present crisis.

Start with the sudden default by financier Altico Capital India Ltd. on a 199.7-million-rupee ($2.8-million) interest payment to Abu Dhabi-based Mashreqbank PSC. Clearwater Capital Partners-backed Altico, which borrows money from banks and mutual funds to make loans to property developers, called the situation a “liquidity crisis.” And that made YES Bank investors gloomy.

Based on January data, the midsize Indian bank had a 4.5-billion-rupee exposure to Altico, the third-highest after Mashreq and HDFC Bank Ltd.

While HDFC Bank, the country’s most valuable lender, has the capital — and current profit — to take the occasional credit hit, YES’s capital cushion is already frayed by dodgy loans to beleaguered shadow banks and troubled tycoons. Both these borrower groups have found it hard to refinance debt since the collapse last year of IL&FS Group, a large Indian infrastructure financier and operator. Altico’s unraveling shows that an end to credit woes is not yet in sight.

At more than $200 billion, India’s world-beating pile of bad loans is bigger than Italy’s. State-run Indian banks are carrying the bulk of the burden, but at least they’re getting dollops of taxpayers’ money and being merged into fewer banking groups. A private-sector lender like YES doesn’t have a formal public backstop. If it can’t fend for itself, the central bank could step in and force an arranged match with a better-run bank. The terms won’t be favorable to Yes shareholders.

To avoid such a fate, YES needs to raise growth capital by convincing new investors that the worst is over. And that brings us to the week’s other big incident. YES shares jumped 13.5 per cent after reports that One97 Communications Ltd., which owns the Indian digital payments network Paytm, may buy out a 9.6 per cent stake in Yes from Rana Kapoor, the lender’s co-founder.

Kapoor was forced to step down as CEO early this year by the Reserve Bank of India amid a controversy over bad-debt accounting.