Health check shows fortunes turning for NBFCs after prolonged crisis

The fortunes of India’s shadow banks are showing tentative signs of recovery, indicating that a prolonged credit crisis may be beginning to ease.

Two of four indicators compiled by Bloomberg that reflect the state of non-bank financial companies strengthened last month from October. A measure of top-rated five-year bond spreads got better, showing that shadow lenders’ borrowing costs are declining. A custom gauge of shares of 20 financial firms and other companies improved.

A recovery in the health of shadow banks, which play a vital role in getting money to everyone from small merchants to property tycoons in Asia’s third-largest economy, suggests that steps taken by the authorities to help the sector may be working. Prime Minister Narendra Modi needs to kick-start lending to shore up consumer confidence and boost economic growth.

Of the two remaining measures, one gauge showed that total outstanding debt at 50 firms affected by the crisis remained high, while the other indicated that there’s ample liquidity in India’s financial markets.

Glimmers of improvement in the sector come almost 18 months after the first default by major lender IL&FS Group. Many in the industry, ranging from Blackstone Group Inc.-backed Aadhar Housing Finance Ltd. to Edelweiss Financial Services Ltd., see a return to normalcy soon.

The picture, however, is far from rosy for non-AAA ranked issuers. Bond spreads remain wide, and Fitch Ratings has a negative outlook for 2020, as local funding, growth and asset-quality strains weigh on non-bank financiers.

The scores attached to each of the measures have been calculated by Bloomberg by normalizing the deviation of the latest value of the indicator from its yearly average. They are assigned on a scale of 1 to 7, with 1 implying weakness and 7 showing strength.

Credit crisis is easing in India, but only for safest corporate borrowers

India’s credit crisis appears to be winding down for the safest borrowers, but it’s hardly time to celebrate as weaker firms still struggle.

Policy makers have been fighting to prevent debt markets from seizing up since the shock collapse of shadow bank IL&FS Group last year.

They can take some cheer in this: spreads on top-rated corporate bonds have dropped back near where they were when the crisis began in September last year.

Much work remains to be done. Lower-rated companies are still struggling with a cash squeeze and rising borrowing costs. Economic growth slowed to 4.5 per cent last quarter, the weakest in more than six years. Corporate financial health has deteriorated to the worst in at least seven years, according to a Care Ratings index.

A series of defaults are keeping investors on edge, said Anil Gupta, a vice-president at Mumbai-based credit rater ICRA Ltd.

The cash squeeze in the nation’s shadow banking industry, which lends to everyone from street vendors to property tycoons, shows few signs of abating. Investors have fled to safer assets after defaults by firms including Altico Capital India Ltd. and Reliance Capital Ltd.

Concerns about governance have also taken a toll, following incidents at companies including Karvy Stock Broking Ltd. and Dewan Housing Finance Corp.

India’s Finance Minister Nirmala Sitharaman has announced a number of measures in recent months to support the economy: corporate tax cuts, a special real-estate fund, bank mergers and a privatization drive.

Meanwhile, the central bank lowered benchmark interest rates by 135 basis points in 2019, before pausing last week.

As policy makers assess the challenges ahead in 2020, they must grapple with the financing needs of weaker borrowers that are yet to benefit as much from the steps this year.

Issuers with ratings at or above AA- have sold a record Rs 5.8 trillion ($82 billion) of notes this year. In contrast, issuance from firms with lower ratings has slid to a six-year low of Rs 182 billion, so far in 2019, data compiled by Bloomberg show.

Indian shadow banks remain weak as credit crisis continues unabated

The health of India’s shadow banks remained weak last month as a credit crisis continued to sting.

Among four indicators compiled by Bloomberg News covering areas including liquidity and share performance, three were stuck in the same position as the previous month, with two at levels indicating weakness.

Another gauge showed total outstanding debt increased at 50 financial firms and other companies impacted by the crisis, as banking-system liquidity remained buoyant given the central bank’s monetary easing.

To be sure, the absolute amount of outstanding debt wasn’t at alarming levels, and access to credit markets for healthier financiers could help get money flowing more efficiently again -- just what the flagging economy needs. But if more troubled borrowers continue to add rather than pare borrowings, that could prolong the crisis.

Authorities have taken more steps recently to help the shadow bank sector, which plays a vital role in getting money to everyone from small merchants to property tycoons. Some observers see an extended battle, as the nation’s slowing economy complicates those efforts.

India's debt gauge

Moody’s Investors Service recently warned that a prolonged credit squeeze among India’s financiers may worsen, just as S&P Global Ratings said risks of contagion are rising in the financial sector. The premium that investors demand to hold shadow lender bonds over sovereign notes is persistently high and a custom gauge of shares of 20 financial firms and other companies impacted by the crisis remained sluggish.

To help creditors recover their money quickly from troubled shadow lenders, India last week unveiled insolvency rules. The more than 15-month-old credit crisis has choked economic growth to its slowest pace in six years and company defaults on rupee bonds are at a record high. Dewan Housing Finance Corp. and Altico Capital India Ltd. are among lenders that defaulted this year, adding to the risk-off sentiment in local markets.

The scores attached to each of the indicators have been calculated by Bloomberg by normalizing the deviation of the latest value of the indicator from its yearly average and have been assigned on a scale of 1 to 7, with 1 implying weakness and 7 showing strength.