Troubles among the country’s non-banking financial companies (NBFCs) will persist for at least a year even if the danger of a full-blown financial crisis has passed, according to the head of the nation’s most valuable bank.
Tighter regulatory oversight and asset sales have staved off the worst of the problems afflicting the NBFCs following last year’s defaults by IL&FS, according to HDFC Bank’s managing director Aditya Puri. Even so, it will be another 12 to 18 months before the liquidity issues in the wider sector are resolved, Puri added in an interview with Bloomberg News editor-in-chief John Micklethwait.
“It’s not a Lehman-like thing that comes and then there is contagion across the system,” Puri said, referring to the US firm that collapsed a decade ago and plunged the global economy into a downturn. “The crisis is over, the problem remains.”
Last year’s defaults by IL&FS exposed fault lines among the country’s shadow lenders, which had grown rapidly to account for a third of all new loans over the previous three years. Though the government’s decision to seize the company helped contain the crisis, a lingering credit crunch has led to reduced demand for goods like automobiles and triggered investor concerns about the nation’s mutual funds that hold debt issued by non-bank finance companies.
Shadow banks are still struggling to raise funds, including from the mutual funds which already hold about $46 billion of the sector’s debt, according to an estimate by Credit Suisse Group. Those that can tap the markets are paying about 30 basis points more than other top-rated corporates, according to data compiled by Bloomberg.
HDFC Bank had an exposure of $7 billion to NBFCs and related firms as of December, compared with $11 billion for its nearest private-sector rival ICICI Bank, filings show. The exposure of the wider Indian banking industry was about $92 billion in March, according to an estimate from the ratings firm Icra. Puri said HDFC Bank has no exposure to IL&FS.
What Bloomberg intelligence says
A liquidity crunch at NBFCs should support HDFC Bank’s competitive edge in cheap funding, according to Diksha Gera, a bank analyst.
Under Puri, HDFC Bank has also skirted the country’s bad-loan crisis, which hurt many of the nation’s other lenders. That has helped its shares outperform the broader banking index each year since 2014, boosting its market capitalisation to more than double that of State Bank of India, the nation’s largest lender by assets.
The stock has gained 21% in the past 12 months, beating the 16.6% increase of the 10-member S&P BSE Bankex Index.
Though India still has among the world’s worst stressed asset ratios, soured credit as a share of total loans is estimated to have shrunk to 10.3% by March from 10.8% in September, according to the Reserve bank of India.
The banking industry has made “substantial progress” in dealing with its non-performing loan problem, Puri said.
He pointed to better recognition of soured debt, closer central bank inspections and more disciplined behaviour by borrowers after the implementation of the nation’s new bankruptcy law.
This gives the government a window to add fresh capital into struggling state-run banks, Puri said. Government-controlled lenders account for about 90% of bad debt and Moody’s Investors Service estimates they will probably need some $3.5 billion to bridge capital needs this financial year, on top of the $28 billion the government has injected over the past two years.
For now though there is an adequate amount of money in the system to fund India’s economic growth, Puri said. “When new capital investment comes into the private sector, the demand could possibly be slightly more than what the capability is, by which time I hope they would have infused the capital.”