It has been over a year since the defaults at Infrastructure Leasing & Financial Services (IL&FS) shocked the markets and set in a liquidity crisis across India’s non-banking financial services sector. However, the sector may not be out of the woods yet, and could have a bearing on the already weak economic growth.
“There is a rising risk of contagion in the Indian financial sector,” said global credit ratings agency Standard and Poor's (S&P) on Wednesday.
Since the IL&FS crisis hit, NBFCs were left gasping for liquidity as raising funds became difficult. That has led to several defaults in 2019, including at mortgage lender Dewan Housing Finance (DHFL), and more recently at real estate-focussed lender Altico Capital.
In this backdrop, many finance companies have lost more than half of their equity value this year and credit markets are now charging huge premium on debt issued by the riskier finance companies, noted S&P. “India’s finance companies are among the country’s largest borrowers. A substantial part of the funding comes from banks. The failure of any large NBFC or housing finance company (HFC) may deliver a solvency shock to lenders,” said Geeta Chugh, credit analyst at S&P Global Ratings.
The Reserve Bank of India, in a report released in June this year, had highlighted that failure of an HFC and or an NBFC with the maximum capacity to cause solvency losses to the banking system could lead to a failure of at least one bank.
Such a scenario could lead to “dramatically negative effects” for credit growth and the wider economy, warned Chugh. Real estate developers, who are large borrowers from NBFCs, have found it tough to raise funds given the latter’s troubles.
“The failure of a large finance company may have other consequences, such as draining the credit available to the sector. This contagion runs the risk of spreading to real estate companies too,” said Chugh.
Given the seriousness of the risks, S&P expects the Indian government to support the systemically important institutions that get into trouble. “The support is more likely to be available to banks rather than any finance company,” it said.
