India’s leading business groups have urged the Reserve Bank of India to increase liquidity and ease lending restrictions on fragile state banks to boost economic growth, siding with Prime Minister Narendra Modi’s government in a key part of its confrontation with the central bank.
In seemingly co-ordinated announcements, the Confederation of Indian Industry (CII), and the Federation of Chambers of Commerce and Industry — India’s two largest business organisations — called on the RBI to intervene to stabilise a troubled financial system and keep India’s economy on track.
Their public calls come amid high tension between New Delhi and the RBI over what the central bank has depicted as a government effort to influence central bank policy on sensitive issues ahead of a general election in the next six months.
“The immediate concern is to alleviate investor and depositors’ concerns,” the CII said in a statement. “Such steps need to be taken with the intention to provide stability and certainty, as well as tackling the liquidity shortages.”
India’s financial markets have been roiled by recent debt defaults by Mumbai-based Infrastructure Leasing & Financial Services, a 30-year-old non-bank financial company (NBFC) — or shadow bank — that has funded some of India’s most ambitious infrastructure projects, including mountain tunnels, toll roads and sports stadiums.
Its woes have rattled India’s commercial debt market as IL&FS paper was rated domestically as triple A only weeks before it defaulted in September, raising doubts about the credibility of India’s credit rating systems.
“If people lose faith in credit ratings, the market basically shuts down,” said Gopal Jain of Gaja Capital, an India-focused private equity firm that holds stakes in several banks and NBFCs. “This is a source of huge heartburn in the system. What was an IL&FS problem has become a systemic problem, as the debt capital markets are now functioning at a fraction of their former volumes.”
That slowdown is now affecting other NBFCs, which have been important drivers of India’s economy over the past two years, providing loans for everything from buying homes, motorbikes, tractors and trucks to funding the working capital needs of small businesses.
In the past two years, credit from India’s shadow banks has expanded by over 20 per cent a year, pushing India’s overall credit growth to at least 10 per cent a year, though bank credit growth averaged 7 per cent a year, according to Credit Suisse.
Overall credit growth, which hit 14 per cent in the first quarter of the current financial year, is now expected to fall as debt market investors — including some India’s biggest business houses — are reducing their exposure to NBFCs.
Critics, including many in government, believe the RBI should have been more proactive to prevent the trouble at IL&FS from affecting other lenders, and they still want the central bank to open a special liquidity window for the sector. But the RBI has been cautious, fearing that such facilities could be abused by poorly run companies with bad assets on their books.
Warning of a “contagion effect” as NBFCs struggle to access credit, the CII echoed the government’s appeal to the RBI to provide emergency liquidity to ensure the financial system’s ability to support “the India growth story” remains “uninhibited”.
“The RBI is required to intervene in the interest of the entire financial sector,” it said. It also echoed New Delhi’s demand that the RBI ease lending restrictions imposed on 11 financially fragile state-owned banks so they can revive lending into the real economy.
Saurabh Mukherjea, founder of Marcellus Investment Managers, said there was irony in business associations — whose own members are pulling funds from the commercial debt market — appealing for the RBI or state banks to lend more to NBFCs.
“Everybody wants to avoid the NBFCs collapsing but nobody wants to foot the bill,” he said. “There is no dearth of money in the banking system, but the banks are not lending on to the NBFCs because they are worried about what will happen to those loans in the wake of the IL&FS debacle.”
“Everybody wants somebody else to bell the cat,” he added.