India’s still reeling-shadow banks face fresh cash shortage risk

Bloomberg Mumbai | Updated on January 31, 2019 Published on January 31, 2019

Essel Group among larger borrowers from funds: Credit Suisse

India’s shadow lenders are facing a fresh threat, just as they were starting to recover from the fallout of landmark defaults last year by one of their own.

The lenders could come up against a new cash shortage, if concerns about debt at conglomerate Essel Group ricochet through India’s money markets, according to Citibank and Credit Suisse. There’s reason to think that may happen, the argument goes, after Essel’s billionaire founder Subhash Chandra said on Friday that it has increased debt levels and a diminished ability to service borrowings.

Here’s how things could get ugly: Mutual funds hold a lot of debt securities issued by Essel Group. Those funds also invest in commercial paper and other short-dated borrowings from the so-called non-bank financing companies. If the mutual funds face redemptions due to concerns about Essel, they might have to sell off NBFC debt also, which would effectively crimp an important financing channel for those shadow lenders.

Media tycoon Chandra said in an open letter that poor investments in the infrastructure sector combined with the meltdown of Infrastructure Leasing & Financial Services Ltd. have led to increased debt and losses. Defaults at IL&FS have roiled the credit market and made it harder for other non-bank lenders to access funds.

Concerns about Essel may lead to a second wave of risk aversion in domestic debt funds and volatility in their flows, according to a Jan. 28 investor note by Credit Suisse Securities (India).

* Essel, which has businesses ranging from media to infrastructure, is among the larger borrowers from local mutual funds, from which non-bank financial companies raise money, Credit Suisse said.

* Mutual funds hold about ₹6,500 crore ($914 million) of debt securities issued by group companies, Essels spokeswoman said in an emailed response to a query.

* Essel is trying to sell assets, including a stake in flagship Zee Entertainment Enterprises Ltd., to repay debt.

* Even as Essel and its lenders have announced an understanding regarding share pledges, its likely that institutional investors in some of the debt mutual funds with Essel holdings might seek redemptions, putting pressure on corporate bond market liquidity where mutual funds are a large player, according to Citibank Global Markets India.

* We see a risk of liquidity conditions tightening further, especially in a seasonally tight February-to-March period, Citibank said in an investor note on Jan. 28.

Published on January 31, 2019

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.