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Bad news for borrowers: Rise in NBFCs' funding cost may make loans costlier

Debt concerns have pushed funding costs for non-bank financing companies to multi-year highs in recent weeks

Saloni Shukla | Bloomberg 

Representative image
Representative image

When India’s shadow sneeze, lots of others catch a cold.

Debt concerns have pushed funding costs for to multi-year highs in recent weeks. That’s bad news for all the who rely on the in the world’s fastest-growing major economy -- from poor entrepreneurs getting micro loans for food delivery businesses to property tycoons looking to roll over debt that fueled a construction boom.

The development will make money more expensive for a huge range of enterprises and individuals, at a crucial time for policy makers. Teetering economic activity is already pressuring the central bank to deliver on expectations for a back-to-back interest rate cut in April. And Prime Minister Narendra Modi must avoid any economic turbulence ahead of elections next month.

Spreads on top-rated five-year bonds of Indian non-bank have risen 75 basis points from the end of August to near their widest levels since 2012, according to data compiled by Bloomberg.

The problems started late last year following shock defaults at shadow lender Things looked better briefly earlier this year after authorities stepped in to increase liquidity, but more surprises popped up in the past few months. Debt concerns at conglomerate Essel Group and troubles for mortgage lender Corp. have since pushed financing costs higher.

“Recent issues with a few created a second wave of worry, the issues we thought were dissipating early January are now resurfacing,” said Prakash Agarwal, head of financial institutions at India Ratings. “The cost of funds for lower-rated will become disproportionately higher as we go forward.”

with AA ratings were paying about 10.68 per cent for money last month, up 64 basis points since September, according to the latest analysis by CARE Ratings of weighted average rates.

Essel’s debt worries ricocheted through India’s money markets last month and debt instruments at Dewan Housing were downgraded amid corporate governance concerns.

ICRA expects growth in lending by to halve in the second half of the 2019 fiscal year to 12 per cent on the back of the funding squeeze and risk aversion. The account for 50 per cent of overall borrowing from the debt market, according to ICRA.

“The crisis has to be addressed specifically in terms of measures to reduce credit spreads," says Srinivas Varadarajan, managing director for fixed income and currencies at Deutsche Bank AG in Mumbai. One option would be for the central bank to take AAA rated corporate debt as collateral, with a government guarantee, he said.

First Published: Fri, March 22 2019. 08:58 IST