India’s troubled non-banking finance companies face their biggest test yet in the months ahead: a record bill to settle in the local debt market. The lenders will need to repay ₹1.1-lakh crore ($15.1 billion) of local-currency bonds in the three months starting April 1, the most ever for a quarter. That will prove challenging for the lower-rated ones among them, given they have been largely shut out of the domestic funding market.

While India’s credit crisis is showing some signs of easing with borrowing costs dropping for top-rated NBFCs, defaults remain a risk for weaker firms. More missed payments could undermine the Indian administration’s efforts to boost credit in an economy set to grow at its slowest pace in more than a decade.

Shadow banks are recovering from a prolonged cash crunch that began in 2018 with defaults at the IL&FS Group. They have been a key source of funding for everyone from India’s smaller businesses to its tycoons as the nation’s banking system battles the world’s worst bad loan ratios.

The top five Indian companies with the highest amount of rupee notes falling due in the next quarter owe 546 billion rupees to investors, or about half of the total amounts due. Housing Development Finance Corp, the largest mortgage lender, has the largest rupee bond redemptions among local firms maturing in the April to June period, the data show.

Credit mishaps

Rajat Bahl, the chief ratings officer at Brickwork Ratings in Mumbai, said he does not expect any credit mishaps in the sector next quarter because liquidity conditions are easing gradually for larger firms with banks starting to lend to them. Shadow banks also have a back-stop in the form of the government’s plan to partially guarantee financing to them, he said.

Even so, the ability of weaker shadow banks to service debt remains a risk, said Bahl.

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