Mutual funds continue to shun Indian shadow lenders’ debt despite a liquidity boost from the nation’s central bank and measures from the government to quell investor wariness toward them.
Debt mutual funds spooked by a string of defaults and credit rating downgrades of the non-bank lenders slashed investments in notes from shadow banks to 14% of their total assets in July, the lowest in nearly two years, data from markets regulator show. The funds invested 7.1% of their assets in commercial papers from shadow lenders and 6.9% in bonds last month, the data showed.
Mistrust toward the non-bank finance companies that started with IL&FS Group’s default last year has spiraled after shadow lenders including Dewan Housing Finance Corp. and units of Reliance Capital Ltd. missed repayments on dues. Edelweiss Housing Finance Ltd., Piramal Capital & Housing Finance Ltd. and PNB Housing Finance Ltd. are among other top non-bank lenders that saw their debt ratings cut as a cash squeeze added to default risks.
“Investors have become extremely risk-averse and no one is interested in raising exposure to this sector," said Kaustubh Belapurkar, director of research at India unit of Morningstar Investment Adviser. “Money is moving out of the funds that invest in anything but the top-rated debt."
Read about spooked investors fleeing from India’s debt funds
Measures announced by the policy makers to soothe investor concerns about the segment include:
- The government agreed to provide a partial guarantee to state banks for the acquisition of as much as 1 trillion rupees ($13.9 billion) of highly rated assets from non-bank finance companies
- Reserve Bank of India decided to provide required liquidity backstop to the banks against their excess government securities holdings
- The government increased total cash support to home-finance companies to 300 billion rupees from 100 billion rupees
- The government decided to front-load infusion of 700 billion rupees set aside in the budget to boost capital of banks, a move likely to help shadow lenders who are increasingly relying on banks for funds
- RBI raised banks’ counterparty exposure limit to a single non-bank finance company to 20% of its Tier-I capital from 15%
Issuance of less-than-top-rated rupee debt by the shadow banks so far this year has dropped to the lowest since 2014 as the beleaguered lenders shrink their loan books to tide over the cash squeeze. Many of the non-bank financiers have been tapping overseas markets to raise funds, pushing the foreign-currency issuance for the year to a record $17 billion.
“The measures from the government and the central bank will take time to show results," said Belapurkar at Morningstar. “The negative investor sentiment doesn’t look like it’s going away anytime soon."