A spate of money market defaults by Infrastructure Leasing & Financial Services Ltd. has put the spotlight on non-bank finance companies. With banks struggling with bad loans and low capital buffers, non-bank lenders had rushed to tap demand for long-term financing to build roads, power plants and homes. But these lenders borrowed from the short-term money markets to finance long-term loans, raising the risk of defaults should cash flows take a hit.
The central bank last week warned stricter regulations are in the offing to ward off default risks rising from the so-called asset liability mismatch. Depending on short-term debt to garner a bigger share of the South Asian nation’s lending market is a “myopic strategy,” Reserve Bank of India Deputy Governor Viral Acharya said in a briefing on Friday. The regulator is looking at strengthening guidelines for non-bank lenders to avoid “rollover risks,” Deputy Governor NS Vishwanathan said.
Borrowing rates in India’s money markets climbed to a four-year high this month following IL&FS’s defaults. Non-bank lenders have been hit by the rise in funding costs and by caution among mutual funds in buying more of their debt. Stricter rules at a juncture when funding is becoming difficult may force smaller NBFCs to shut.
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