The shadow banking crisis in India raises financing costs abroad

NEW DELHI: Banks in the shadow of India are increasingly pressured by a crisis of confidence in their countries, forcing them to raise more funds abroad. And that is only for the lucky ones.

Non-bank financial companies have struggled to raise both abroad this year, because defaults in the Indian credit market extended after a crash failure by the main shadow lender, ILu0026FS Group, the last year. They have signed $ 1.5 billion in foreign currency loans so far in 2019, below $ 2 billion in the same period last year, according to data compiled by Bloomberg that excludes state lenders.

Average margins jumped to a maximum of three years of 118 basis points, compared to 95 for agreements signed in the same period in 2018, data show.

India's slowest economic growth in six years has caused predictions for deeper interest rate cuts, but that has not yet translated into easier home loan conditions for shadow lenders.

The cash restriction threatens a greater impact, since the higher cost of the funds is transferred to the merchants who obtain microcredits and real estate magnates who seek to renew the debt. Authorities are trying to increase market confidence with measures that include pushing commercial banks to buy high-quality NBFC assets.

Loans abroad for NBFC “Is pertinent to boost buffers at a time when domestic liquidity is not easy to come by for the sector,” said Ashwini Kapila, head of financial institutions group coverage at the Indian unit of Barclays Plc. “Some of these NBFC are open to paying a premium to get this liquidity.”

Foreign lenders are playing it safe and seek to lend only to the main borrowers in the sector, especially those founded by the largest business groups in the country.

That doesn't stop more shadow banks from trying.

At least eight, including Bajaj Finance Ltd, Lu0026T Finance Ltd and Mahindra u0026 Mahindra Financial Ltd, are seeking around $ 1.6 billion in offshore loans, according to data collected by Bloomberg.

While the spate of defaults and rating cuts at shadow banks have dampened perceptions about the sector, bankers have been at work “explaining to global investors that not all NBFC can be painted with the same brush,” Kapila said.