Virus Lockdown to Batter Already-Weakening India Shadow Banks

India’s struggling shadow banks were already showing more signs of trouble before a nationwide lockdown started late last month, and now the halt in most economic activity threatens the lenders further.

Even before the three-week restrictions on the nation’s 1.3 billion people were announced on March 25, borrowing costs were rising for the non-bank lenders amid turmoil in global credit markets. Premiums that investors seek to buy AAA rated five-year bonds of those firms over similar-maturity government notes widened to a 13-month high in March.

That means that among four indicators compiled by Bloomberg to check on the health of non-bank financial companies, two including the debt spread metric worsened last month from February. One stayed put at levels indicating weakness, and only one improved.

India’s lockdown will likely cause its gross domestic product to shrink in the first two quarters of this year due to a collapse in consumption, which makes up 60% of the economy, according to Goldman Sachs Group Inc. That’s bad news for shadow banks trying to recover from a credit crisis that broke out in 2018.

Even Bajaj Finance Ltd., one of the most successful non-bank lenders that saw its loan book grow 32% in 2019, is feeling the pain from the pandemic response. In the last 10 days of the lockdown, the lender lost 350,000 customers and 47.5 billion rupees ($624 million) in assets under management, it said in an analyst conference call on April 6.

“A recovery in India’s non-bank financial crisis will take longer now as the lockdown will hit business,” said Sujan Hajra, chief economist at Anand Rathi Shares & Stock Brokers. “Lower-rated shadow lenders are likely to be hit the most.”

See also: India’s Place in Global Markets at Stake in Virus Response

The financiers in India aren’t alone in facingtougher times due to the pandemic, with non-bank lenders from the U.S. to China also seeking bailouts to stave off bankruptcy and the possibility of collapse. To counter the economic impact of the outbreak, the Reserve Bank of India unleashed $50 billion of stimulus, helping a gauge measuring liquidity in the banking system to improve.

But the big cash boost from the central bank hasn’t dispelled concern among creditors. Every 15 days that India is in lockdown will cut its economic growth by 2.2 percentage points, and it’s yet to be seen how much a financial package can counter losses, said Hajra at Anand Rathi. The nation’s GDP grew 4.7% from a year earlier in the fourth quarter of 2019.

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

• A custom index of the share price of 20 firms affected by the 19-month old credit crisis worsened
• Outstanding debt at 50 non-bank financiers stayed stagnant

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.

--With assistance from Anil Poonia and Chloe Whiteaker.

To contact the reporter on this story:
Divya Patil in Mumbai at dpatil7@bloomberg.net

To contact the editors responsible for this story:
Andrew Monahan at amonahan@bloomberg.net

Ken McCallum, Beth Thomas

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