Money & Banking

Contagion risks rising in financial sector, warns Standard and Poor’s

Our Bureau Mumbai | Updated on October 23, 2019

Global rating agency Standard and Poor’s, on Wednesday, warned there is a rising risk of contagion in the Indian financial sector. “Markets reflect this fragility. Many finance companies have lost more than half of their equity value in the past year, and credit markets are charging huge premiums on debt issued by the riskier finance companies,” it said in a report titled ‘Indian Financial Sector Braces for Fat Contagion Tail Risk’.

Pointing to the recent analysis by the Reserve Bank of India, which suggested that the failure of any top-five HFC or NBFC could result in the default of up to two banks, S&P said this could have dramatically negative effects for the credit growth and economy.

“India’s finance companies are among the country’s largest borrowers. A substantial part of this funding comes from banks.

“The failure of any large non-banking financial company (NBFC) or housing finance company (HFC) may deliver a solvency shock to lenders,” said S&P Global Ratings credit analyst Geeta Chugh.

In its base case, S&P said it expects the resolution of weak finance companies to be swift and orderly and that contagion will be managed. It pointed out that even the default by Dewan Housing Finance Ltd has not generated the kind of panic that was seen after the default of Infrastructure Leasing and Financial Services Ltd in mid-2018.

Government support

It said it also expects the government to support systemically important institutions that get into trouble, although the support is more likely to be available to banks rather than finance companies.

On Tuesday, rating agency Fitch had said that banks would face a capital shortfall of about $50 billion or about ₹3.5-lakh crore in the event of a systemic crisis in the non-banking financial sector.

“The credit profiles of state-owned banks would come under significant pressure, and the weakest – including those with viability ratings in the ‘b’ range – would face heightened solvency risks without capital injections from the government,” a stress test conducted by Fitch Ratings had found.

Published on October 23, 2019

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