Shadow bank concerns grip Indian economy
(16 August 2019 - India) The credit crunch among India's non-bank lending sector has begun to squeeze the economy evidenced by the critically important auto sector announcing deep job cuts as reduced consumer lending harms growth.
Nonbank lenders have struggled to access capital through H2 2019 due to the 2018 default of Infrastructure Leasing & Financial Services (IL&FS). The group was inundated with US$13 billion in debtand interest payments exceeding operating profit.
The major non-bank lender relied heavily on short-term debt to fund infrastructure projects that typically take long time periods to reach profitablity. Late payments from its own debtors also contributed to the default.
Indian banks struggling with bad debt provisiosn have avoided car and fleet loans in recent years, resulting in shadow banks stepping in to fill the gap. Outstanding vehicle loans from nonbank lenders surged 60 percent year-on-year to 1.67 trillion rupees (US$23.5 billion) at the end Q1 2018 according to Reserve Bank of India data. Nonbank financing is reportedly responsible for roughly one in three passenger vehicle sales and up to two thirds of commercial vehicle and fleet sales. The auto sector contributes more than 7 percent to the gross domestic product (GDP) in Asia's 3rd largest economy. India’s GDP growth slowed to the lowest level in five years, falling to 5.8 percent in Q1 2019 from 6.6 percent in Q4 2018.
“We are choking our economy of credit” stated Bajaj Finserv CEO Sanjiv Bajaj who runs one of India’s largest nonbank lenders on the subsequent squeeze on the sector.