Shadow banking crisis starting to hit India’s consumers

Bloomberg

Karan Dua, an electronics shop owner in south-central Mumbai, placed his hope of crackling sales on Diwali — the Hindu festival of lights when Indians splurge on everything from clothes to cars and jewellery to houses.
It hardly lit up business for the 35-year-old shop owner. Businesses like Dua’s are seeing sluggish sales this festive season in part because India’s shadow lending industry, which accounted for nearly 4 out of every 10 consumer loans in the last three years, has grown more cautious about extending new credit amid a funding crunch of its own.
Loan volumes for some of these lenders dropped to 10 percent of the levels seen before defaults by a troubled financier from August onward made it costlier for all non-bank financial companies to raise funds, according to Indostar Capital Finance Pvt. which makes loans to companies, and individuals for home and vehicle purchases. The cash crunch for the industry came at the start of the peak shopping season in India, threatening consumption, which is the backbone of the economy, say economists.
“The amount the non-bank finance companies are lending has come down considerably,” said R. Sridhar, an industry veteran and chief executive officer at Indostar Capital. “Particularly lenders whi-ch give loans for buying consumer durables, vehicles and go- ld.” In India, NBFCs and lenders to housing sector have become increasingly important in supporting consumer spending as nati- on’s formal banking sector is weighed down by bad loans. Nomura Inc estimates that loan bo- oks of NBFCs and housing len-ders have grown at a compou-nded annual rate of 17 percent in the past two years, compared with 8 percent for banks.
Such growth looks difficult to sustain as liquidity dries up, with the Bloomberg Economics India Banking Liquidity Index showing a nearly 1 trillion rupee shortfall of cash in the banking system. That, along with a 50 basis-point interest rate increase by Reserve Bank of India this year and the recent rise in borrowing costs in the credit market, is likely to have a ripple effect.
“With banks tightening credit to NBFCs and they in turn to retailers, transporters, and builders, there will likely be lower credit growth for the rest of the financial year and beyond,” said Anjali Verma and Raag Haria, analysts at PhillipCapital India Pvt. “Urban and semi‐urban demand may be dented due to limited NBFC lending.” Madan Sabnavis, chief economist at rating company Care Ratings Ltd, has penciled in an expansion based on robust consumption. But should demand falter because of tighter liquidity conditions, then growth would take a hit, he cautions.