How will IL&FS crisis hurt India's struggling NBFC sector? Fitch explains

The debt crisis in IL&FS has adversely impacted the growth of the NBFC sector in India and might lead to its consolidation, said a report by Fitch Ratings on shadow banking. Non-banking financial companies (NBFCs) are commonly referred to as the shadow banking sector.

The report comes against the backdrop of the Reserve Bank of India's decision to create a specialised cadre to supervise and regulate the financial sector, including banks and NBFCs. The Indian shadow banking industry's rapid growth and reliance on short-term funding sources "bubbled over" in 2018, most evident by the default of Infrastructure Leasing and Financial Services (IL&FS) in September last year, the report said.

Default by IL&FS, it said, translated into higher borrowing costs and reduced market access for other non-bank financial institutions, leading to domestic regulators to re-examine liquidity norms for the sector and prod banks to increase their lending to, and asset purchases from, such entities. "Fitch believes these dynamics will weigh on growth prospects for the sector and likely lead to industry consolidation," the report said.

The cash-strapped IL&FS group is sitting on a debt of about Rs 94,000 crore. The management of the company's board has been taken over government-appointed directors. Several group companies have defaulted on the payment of interest payment on loans

The report also noted that the Indian shadow banking system has grown rapidly over the last decade, with a particular spike in 2017 driven by finance companies providing asset finance and home loans and funds investing in infrastructure loans. Non-bank growth, it added, was fuelled by accommodative funding market following demonetisation of high-value currency notes in November 2016.

(With inputs from agencies.)