Money & Banking

Why the NBFC crisis is entering a new phase

Suvashree Ghosh June 17 | Updated on June 17, 2019 Published on June 17, 2019

Just as Indian banks emerge from under a pile of bad loans to large energy, steel and other industrial companies, they are facing a new reckoning from the accelerating crisis in the NBFC sector.

IL&FS defaults

A year after a series of defaults by Infrastructure Leasing & Financial Services (IL&FS) forced the government to intervene and exposed weaknesses in the sector, the problems of India’s non-banking financial companies are entering a new phase. Other weaker lenders such as Dewan Housing Finance Corp and Anil Ambani’s Reliance Capital are struggling, putting the loans they received from a handful of the regulated banks at risk.

“There will be some defaults, some additional slippages on banks’ books from the NBFC sector and that will be reflected in the performance of some of the bank stocks, which are more exposed to the weak NBFCs,” said Suresh Ganapathy, an associate director overseeing financial research at Macquarie Capital Securities in India.

Among the most vulnerable is YES Bank, which has seen its shares plunge 65 per cent in the past year amid wider worries about its lending policies. Last week, Moody’s Investors Service put YES Bank under review for a downgrade, citing its sizable exposure to weaker companies in the NBFC sector.

YES Bank and IndusInd Bank may face higher-than-expected credit costs due to their lending to companies related to large leveraged corporates, UBS AG wrote in a June report.

The lenders showed the greatest vulnerability to new risks emerging in this area and from non-banks and real estate firms, it said.

Credit Suisse Group, in April, identified the two banks as having greater exposures to four stressed groups – Anil Ambani’s conglomerate, Dewan, IL&FS and Essel – along with Bank of India, Bank of Baroda and State Bank of India.

Loans from the shadow banking sector expanded rapidly in the period up to the IL&FS defaults, a time in which the regulated banks were in the depths of a bad-loan crisis, weighed down by some $200 billion of soured credit. Non-banks accounted for nearly a third of all new credit over the previous three years, with some of the loans going to riskier sectors like infrastructure and property development.

The lending binge was funded by bond issues and credit from India’s mutual fund companies, in addition to loans from banks. Since last year, the process has gone into reverse, with Dewan the latest to fall victim to tightening liquidity among NBFCs. The firm’s short-term credit was downgraded to default by the Indian unit of Standard & Poor’s earlier this month. Ambani’s Reliance Capital has been selling assets to meet its repayments.

The spreading debt woes have fuelled talk that the shadow banking crisis is entering a second, more dangerous, phase, posing broader risks to the Indian financial system. Some – including Ambani – have been calling on the government and the Reserve Bank of India to take emergency steps to revive lending, such as flooding the banks with liquidity.

Risk not systemic

For the moment, however, the regulator does not appear to view the crisis as systemic. At its policy meeting earlier this month, the RBI indicated it viewed liquidity conditions as broadly sufficient and would improve transparency around how it assesses this.

A spokesperson for IndusInd Bank said its exposure to NBFCs and housing finance companies, as a proportion of the loan book, is modest at 3.2 per cent and 1.1 per cent, respectively, and standard.

Bank of Baroda’s exposure to NBFCs and housing finance firms is high; however, we are derisking ourselves by entering into pool purchase, co-origination of loans, etc, by which we get an adequate feel on the underlying assets, Executive Director Papia Sengupta said by email.

YES Bank, State Bank of India and Bank of India did not respond to emails seeking comment.

Ganapathy at Macquarie says NBFCs will face a continuing credit squeeze, but the spillover to the banks will be limited and is unlikely to create a system-wide problem. Indian banks as a whole have extended no more than 6-7 per cent of their total loans to NBFCs, and only 10 per cent of that is likely to sour, Ganapathy added.


Published on June 17, 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.