Non-banking finance companies (NBFCs) are getting increasingly squeezed by a crisis of confidence at home, forcing them to cough up more for funds overseas. And that’s just for the lucky ones.
They have struggled to raise as much abroad this year, as defaults in India’s credit market spread after a shock failure by major shadow lender IL&FS Group last year. They’ve signed $1.5 billion of foreign currency loans so far in 2019, down from $2 billion in the same period last year, according to data compiled by Bloomberg that excludes state-run lenders.
Average margins jumped to a three-year high of 118 basis points, compared with 95 for the deals signed in the same period in 2018.
India’s slowest economic growth in six years has prompted predictions for deeper interest rate cuts, but that is yet to translate into easier borrowing conditions at home for the shadow lenders.
The cash squeeze threatens a broader fallout, as the higher cost of funds is passed on to merchants getting micro loans and property tycoons looking to roll over debt. Authorities are trying to boost market confidence with measures, including nudging commercial banks to purchase high-quality NBFC assets.
“Overseas borrowings by NBFCs is pertinent to boost buffers at a time when domestic liquidity is not easy to come by for the sector,” said Ashwini Kapila, head of financial institutions group coverage at the Indian unit of Barclays. “Some of these NBFCs are open to paying a premium to get this liquidity.”
Foreign lenders are playing it safe and seeking to lend only to the top borrowers from the sector, especially those founded by the nation’s largest business groups. That’s not stopping more NBFCs from trying.
At least eight, including Bajaj Finance, L&T Finance and Mahindra & Mahindra Financial, are seeking about $1.6 billion in offshore loan facilities.
While the spate of defaults and rating cuts at NBFCs have dampened perceptions about the sector, bankers have been at work explaining to global investors that not all NBFCs can be painted with the same brush, said Kapila.