RBI spells out concerns over India’s spreading shadow banking crisis

Bloomberg

India’s financial regulator has spelled out its concerns about the implications of the country’s spreading shadow banking crisis, saying any failure among the largest of the non-bank finance firms could cause losses comparable to a collapse among the major banks.
In its latest Financial Stability Report released, the Reserve Bank of India said the potential losses in the event of the failure of a large housing finance company or non-bank financial company underscore “the need for greater surveillance over large HFCs/NBFCs.”
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 shadow banks 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.
That poses a new challenge for the RBI, just as Indian banks start to emerge from under a pile of bad loans to large energy, steel, and other indus-trial companies. RBI Governor Shaktikanta Das, who took
the post six months ago, said in the report that banks need to focus on governance reforms, while shadow lenders should work on “sustainable” balance sheet growth.
Dewan Housing and Reliance Capital were among the worst performers on S&P BSE 500 Index as of 3:20 p.m. in Mumbai trading. Dewan slumped more than 12 percent while Reliance Capital fell about 7 percent. Among banks on the 10-member Bankex index, Yes Bank and IndusInd Bank, which have high exposure to non-bank lenders, clocked the biggest drop with loses of more than 3 percent.
The RBI’s latest concerns center on the risk that a credit crunch at non-bank financial companies could lead to defaults and higher borrowing costs, with spin off effects on the traditional lenders. The NBFCs and HFCs have funded themselves by borrowing from banks, mutual funds, insurers, and pension funds, exposing other financial firms in the event of a default.