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Alternative Financial Companies fill the void in Loan Supply

Posted by : Siddharth Jalan on | Aug 21,2018

Despite the downward movement China’s Shanghai index, the S&P Bombay Stock Exchange continues to trend higher. This development comes despite a decline in the Indian Rupee which has been trading under pressure in tandem with most EM currencies. The Rupee has dropped to more than 70 INR per dollar.  However, the weakening of the Indian currency has not led to an exodus from the equity markets. The Reserve Bank of India has kept rates stable and has avoided raising rates substantially, similar to the way Argentina has increase rates to defend its currency. FT reports that an activist has joined the RBI, which could create a new dynamic for the central bank. Loan demand continues to increase in India. The void left by the banking sector is being filled by non-bank institutions.

India’s Banking Sector has Been Hurt by Bad Loans
The financial sector in India has been under pressure despite the rally in equity markets. Most of the banks have been hurt by defaults on loans.  The decline in the banking sector has brought an opportunity for new financing companies to step in and take some of the market share vacated by the banks.  The Financial Times reports that the total balance sheet of India’s 11K non-bank financial companies is now a whopping 316 billion.  They now account for nearly 13% of all the outstanding loans in the corporate sector.

The benefits of having other financial companies filling the void left by stressed banks, is that loans have increased. The FT reports that Central bank data shows that borrowing throughout India has increased by 19% which is double the rate of equity increases. Demand for credit across India remains robust. India’s SME sector is expanding at a rate of approximately 15% per annual and should continue to move at that pace for the next decade according to the FT report.  Alternative banks have also seen their equity values soar.  While some of the standard banks in India are barely trading above book value, the alternative institutions are seeing their equity prices surge to more than 9-times earnings.

Non-bank loans have allowed the Indian economy to continue to grow without the government having to bail out its banks.  As opposed to having a good and bad bank, alternative financial companies have filled the void and created a “good” bank with robust balance sheets.

Rift Could Grow at the RBI
The FT report that Swaminathan Gurumurthy does not have the same credentials as other central bank members and is not a career politician or civil servant.  The FT reports that Mr Gurumurthy is a “rightwing activist and economic commentator”, and a regular critic of the policies created by the Reserve Bank of India.  His appointment has been met will lots of opposition by the Congress party and many are concerned about how his view will affect the central bank. Some believe that his appointment will compromise the integrity of the RBI.