A solvency shock for lenders!
There is a rising risk of contagion in the Indian financial sector, said S&P Global Ratings in a cautious noted, adding that markets reflect this fragility.
Many finance companies have lost more than half of their equity value in the past year, and credit markets are charging huge premiums on debt issued by the riskier finance companies, said S&P Global Ratings in a report titled “Indian Financial Sector Braces For Fat Contagion Tail Risk” released on 23 Oct 2019.
India’s finance companies are among the country’s largest borrowers. A substantial part of this funding comes from banks. The failure of any large non-banking financial company (NBFC) or housing finance company (HFC) may deliver a solvency shock to lenders, said S&P Global Ratings credit analyst Geeta Chugh.
A recent contagion analysis released by the Reserve Bank of India (RBI), the central bank, suggests that the failure of any top-five HFC or NBFC could result in the default of up to two banks. That could have dramatically negative effects for the credit growth and the economy.
The failure of a large finance company may have other consequences, such as draining the credit available to the sector. This contagion runs the risk of spreading to real estate companies too. Finance companies are the largest lenders to this segment and any failure among such institutions could jeopardize credit flows to developers.
The bankruptcy of an originator of securitized pool of retail assets would also hinder collections, at least until substitute servicers can be appointed and operational issues sorted.
“In our base case, we expect that the resolution of weak finance companies will be swift and orderly, and contagion will be managed,” said Chugh.
The default earlier this year of Dewan Housing Finance Ltd, a large HFC, is a case in point. Creditors are aiming for a quick resolution of this matter, and to limit losses to around 30%-40%. The DHFL default has not generated the kind of panic that we saw after the default of Infrastructure Leasing & Financial Services Ltd. in mid-2018.
“Given the seriousness of such risks, we expect the Indian government to support systemically important institutions that get into trouble. The support is more likely to be available to banks rather than any finance company. Our assessment accounts for the key role of banks in the economy, particularly in providing funding to priority sectors, and that depositors form a large political constituency,” said Chugh. fiinews.com
