Shadow banking crisis raises risk of renewed Indian bad-loan reckoning

18 June, 2019 12:00 AM printer

MUMBAI: Just as India’s 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 country’s shadow banking sector.

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

“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 Ltd., which has seen its shares plunge 65 percen t 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 Ltd. 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 nonbanks and real estate firms, it said.

Credit Suisse Group AG 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.