Investors grow selective with weaker Indian shadow banks after debt binge | Banking - Business Standard
Investors are growing increasingly selective with Indian shadow lenders’ debt, spelling trouble for smaller players in the market after the sector’s multi-year high foreign debt sales in 2024.
Tata Capital Ltd.’s recent US-currency bond is an example of this trend. With an investment-grade rating of BBB-, the company received orders for over four times the $400 million issue size in its inaugural bond, due in July 2028, carrying a coupon of 5.39 per cent.
That’s 336 basis points lower than the coupon on similar-maturity debt issued by junk-rated IIFL Finance Ltd., which only received bids over twice its issue size.
Borrowing locally has become harder for non-bank finance companies after the Reserve Bank of India tightened rules in late 2023. If overseas interest begins to wane, smaller firms with weaker credit profiles could face even greater difficulty securing funding. The prospect is concerning due to a wave of debt maturities, with financiers required to repay 3.2 trillion rupees ($37 billion) in all currency bonds this year, the highest in two years, according to Bloomberg-compiled data.
“We are largely comfortable with the best in class and larger ones,” said Dhiraj Bajaj, Singapore-based chief investment officer of Asia fixed income and equities at Lombard Odier Investment Managers. The main risk of moving down the quality ladder is higher delinquencies from poor asset quality, worsening socio-economic conditions, limited access to funding, and rising borrowing costs, he said.
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As NBFCs play a key role in the economy, lending to everyone from roadside vendors to property tycoons, any strain on their funding could worsen challenges for India, which is already facing its weakest economic expansion since the pandemic this fiscal year.
The RBI’s move to curb unsecured loans by lenders and shadow banks, aimed at checking a surge in risky debt, drove financiers to raise $4.5 billion from foreign currency bond sales in 2024, the highest in five years, according to data compiled by Bloomberg.
They also borrowed $20.5 billion via overseas loan between January and November, according to the latest RBI data, the highest since at least 2018. Leading this was Shriram Finance Ltd., which sold a $1.3 billion multicurrency debt. The largest-ever offshore loan by an Indian shadow financier drew a dozen banks, including the International Finance Corp.
“Sound fundamentals of the economy and healthy balance sheet of corporates have improved investor appetite for Indian companies debt,” said Kalpesh Ojha, chief financial officer at Bike Bazaar. The company, which finances two-wheeler purchases, is in talks with banks for its maiden $30 million loan and expects to complete the transaction this quarter, he said.
For investors, buying into India’s debt presents a chance to tap into one of the world’s fastest-growing economies, earn higher yields, and diversify away from China. However, increasing regulator scrutiny of shadow banks has made some investors cautious. Goldman Sachs Group Inc., for instance, prefers debt of Indian renewable sector, analysts Kenneth Ho and Sandra Yeung said in their 2025 outlook for Asia Credit.
While some issuers will face checks over asset quality and regulatory risks, Indian shadow bank offshore debt offers good opportunity for investors, according to Bharat Shettigar, head of credit desk analysts at Standard Chartered Plc.
Since 2024, six high-yield-rated non-banking firms have sold dollar bonds, with the yield spread on their 2028 maturities hovering around 300 basis points. “Investors are clearly differentiating between the larger credits and the smaller ones,” Shettigar said.
An increase in delinquencies has been observed in unsecured lending, particularly in segments like personal loans and microfinance, according to Krishnan Sitaraman, senior director and chief ratings officer at Crisil Ratings Ltd. “These don’t comprise a significant part of the overall assets under management of the NBFC sector.”
Meanwhile, more new borrowers are expected to tap into the dollar bond market, as they seek to diversify their funding sources.
“Some NBFCs will look to borrow from overseas,” said Crisil’s Sitaraman. “It’s not just about lower funding costs — tapping alternative funding sources and newer liquidity pools will be crucial for future growth.”
