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.

ALSO READ: Realtors in deep trouble due to crisis in NBFC segment, says Vikas Oberoi

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.

IL&FS mess: India's shadow banks run out of options, sell bonds to public

Mutual funds and institutional investors are still wary of lending to non-bank financiers, and tighter market liquidity has weighed on company ratings, which deteriorated at the fastest pace in 6 yrs.

Faced with high borrowing costs and a sustained shortage of liquidity in India’s money markets, shadow banks are increasingly pitching bonds with high coupon rates to the public, who may not be aware of the risks they’re taking on.

Still roiling from the shock of defaults at Infrastructure Leasing & Financial Services Ltd., non-bank financing companies are exploring this relatively expensive funding channel. Mutual funds and institutional investors are still wary of lending to non-bank financiers, and tighter market liquidity has weighed on company ratings, which have deteriorated at the fastest pace in six years.

ALSO READ: India should bolster capitalisation of govt-owned banks to tackle NPAs: IMF

Individual investors in other markets have gotten burned. In Singapore, about 34,000 buyers of Hyflux Ltd.’s debt stand to lose almost everything with the fate of the water and power company in the balance. In the Indian market, a lot of companies are selling public bonds with the purpose of building a retail base, said Ashish Agarwal, executive director at A. K. Capital Services.

“The risks of these segments are obviously there and one must be mindful while taking investment calls,” said Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd., the local unit of Moody’s Investors Service. Retail investors may have been swayed by the potential returns on offer and haven’t totally taken into consideration the risks involved, he said.

Public corporate bond issuance by NBFCs increased to 337 billion rupees ($4.87 billion) in the April-to-January period, the highest for a fiscal year in at least a decade, data from the securities regulator show. Volumes stand to increase for the year ended March as final amounts raised from deals by three more shadow banks, including L&T Finance Holdings Ltd. and Indiabulls Consumer Finance Ltd., are incorporated.

Five non-bank lenders, including L&T Finance again and Shriram City Union Finance Ltd., have come to the market so far in April. About 80 percent of L&T Finance’s base offering of 5 billion rupees has been reserved for individual investors, according to the stock exchange.

Retail investors typically don’t understand factors such as shadow banks’ liquidity and the sectors they’re exposed to in their loan book, said Rajat Bahl, chief analytical officer at Brickwork Ratings Ltd.

Business Standard