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A series of money market failures by Infrastructure Leasing & Financial Services (IL & FS) has shone the spotlight on non-bank finance companies. As banks struggled with bad debts and low capital reserves, non-bank lenders rushed to tap the demand for long-term financing for roads, power plants and homes. But these lenders borrowed on the short-term money markets to finance long-term borrowings, increasing the risk of default if cash flow suffered.
Last week, the central bank warned that tighter regulations were about to be lifted in order to ward off the risk of default resulting from what is called asset / liability mismatch. To depend on short-term debt to get a bigger share of the South Asian nation's lending market is a "myopic strategy," said Viral Acharya, deputy governor of the Reserve Bank of India (RBI), on Friday. The regulator is considering strengthening guidelines for non-bank lenders to avoid "turnover risks," said Deputy Governor Vishwanathan.
Indian money market lending rates hit a four-year high this month after the weaknesses of IL & FS. Non-bank lenders have been hit by rising funding costs and by the cautiousness of mutual funds to buy more of their debt. Stricter rules at a time when funding becomes difficult could force small non-bank finance companies (NBFCs) to close.
Investors focusing on non-bank financiers "this is encouraging bond fund managers not to buy NBFC paper," said Neelkanth Mishra, a strategist at Credit Suisse Group AG in Mumbai. "For some of the smaller NBFCs, there will be no option to survive. The good thing is that, systemically, it does not matter. It hurts those companies, which is good. "
Fears of rising costs and more stringent regulation led Friday to a selloff in non-bank finance companies. Bajaj Holdings & Investment, Religare Enterprises, Mahindra & Mahindra Financial Services and Edelweiss Financial Services recorded a drop of more than 7%. Analysts worry that they will not fall further.
NBFCs increased their assets by an average of 18% over the past year, according to data compiled by Bloomberg. IL & FS, a large borrower, accounted for 2% of outstanding commercial paper, 1% of debentures and up to 0.7% of bank loans. He had raised a debt of 91 million Rs on March 31st. Defaults in the company caused panic in the market, prompting the government to seize control of the lender last week.
"Companies will have to raise retail bonds to maintain their growth rates, but the cost of funds would increase," said Umesh Revankar, managing director of Shriram Transport Finance Co., adding that his company was focused on retail and retail. long-term. funds.
Non-bank financiers say that the crisis struck them at a very untimely time. Borrowings increase as India enters the festival and wedding season in October. Buyers of homes, vehicles and even farm and factory equipment can slow down purchases. It could also be a challenge for Prime Minister Narendra Modi in his efforts to strengthen the economy and create more jobs before his candidacy for re-election next year.
"My biggest fear is the lingering doubts, and the impression on this sector could increase borrowing and lending rates, as well as during the holiday season," Shriram's Revankar said. It will slow down the economy, he said.
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