Rating agency Standard and Poor’s (S&P) said it sees a rising risk of contagion in the Indian financial sector as many finance companies have lost more than half of their equity value in the past year, and credit markets are charging huge premiums on debt issued by the riskier finance companies. “India’s finance companies are among the country’s largest borrowers. A substantial part of this funding comes from banks. The failure of any large non-banking financial company (NBFC) or housing finance company (HFC) may deliver a solvency shock to lenders,” S&P Global Ratings said in a note. Non-bank lenders have seen their source of funds suddenly dry up after a series of defaults by Infrastructure Leasing & Financial Services Ltd (IL&FS) that triggered a liquidity crisis. Banks and mutual funds reduced lending to NBFCs and HFCs, creating a cash crunch and forcing the shadow lenders to sell assets and cut back on new loans. The Reserve Bank of India (RBI) has also put caps on withdrawals by depositors after fraud in Punjab and Maharashtra Co-operative (PMC) Bank came into the fore.

(Live Mint)