Signs of recovery for India’s troubled shadow banks have taken a step back as concerns about the true impact of the pandemic on lenders resurfaced.
Average lenders’ AAA-rated five-year bond spreads increased for the first time in four months in September. Of the other three shadow banking sector health tracking indicators compiled by Bloomberg, two, including banking system liquidity and outstanding debt, weakened, while the equity performance index held.
The events are a setback after months of improvement following unprecedented stimulus from the central bank and targeted support for industry, as authorities try to protect the economy from the consequences of the pandemic. The change comes after India’s high court extended loosening of the rules in September on the classification of non-performing loans, raising concerns about the assets of lenders.
The scores assigned to each of the indicators have been calculated by Bloomberg by normalizing the deviation of the last value of the indicator from its annual average. They are assigned on a scale from 1 to 7, where 1 implies weakness and 7 shows strength.
A robust shadow banking system is a must for India as financiers make loans to those that banks often don’t, including the weakest companies. Supporting lenders is essential for Prime Minister Narendra Modi as he seeks to boost the economy, which has suffered its worst quarterly contraction on record.
The shadow banking sector could see further improvements in the future after stronger support for credit markets in recent weeks. The Reserve Bank of India stepped up stimulus measures again in October, promising to fund 1 trillion rupees ($ 13.6 billion) in corporate bond purchases by banks.
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