One step forward, one back for troubled shadow banks

India’s Finance Minister Nirmala Sitharaman said last month that she’s working on more measures to boost growth

India’s shadow banks, which lend to everyone from teashop merchants to property tycoons, get a mixed bill of health in Bloomberg’s latest check.

The sector has been stung by a crisis set off by the shock collapse of non-bank lender IL&FS group in 2018. There’ve been even more setbacks in recent weeks: Altico Capital India Ltd., a real estate-focused lender, has seen some potential rescuers demur.

Revitalization of the industry, whose woes mounted last year when major mortgage lender Dewan Housing Finance Corp. missed repayments, is key to helping staunch a further slowdown in the nation’s economy.

The good news first: total outstanding debt at 50 financial firms and other companies impacted by the crisis fell last month from November, one of four indicators compiled by Bloomberg show. The shadow banks must continue to trim their debt piles to avoid further defaults.

In a sign that creditors remain jittery, borrowing costs rose. The extra yield investors demand to hold five-year AAA rated bonds from shadow banks over government notes increased, one of the gauges shows.

Shadow lender woes have made it harder for policymakers to prop up the economy, which grew at its weakest pace since 2009. The slowdown hurts borrowers’ ability to repay debt, and has prompted the central bank to predict that an improvement in banks’ bad-loan ratios will reverse.

The Bloomberg check-up of the sector’s health also showed that:

• Banking system liquidity remained relatively strong
• But a custom index of the share prices of 20 such firms stayed stagnant

“Not all is hunky-dory with non-bank finance companies yet,” said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial Products Ltd. “Investors are still shy of lending big to the sector, and more than returns from these investments, they are watching out for safety of the credit.”

Many investors have gotten cold feet when it comes to all but the safest shadow banks. Asset manager DSP Investment Managers, for example, said it will shun lower-rated corporate bonds until India’s economic growth revives, which it expects may take another three to five quarters.

The scores attached to each of the measures have been calculated by Bloomberg by normalizing the deviation of the latest value of the indicator from its yearly average. They are assigned on a scale of 1 to 7, with 1 implying weakness and 7 showing strength.