Shadow lenders retreat as bad loans rise amid crackdown

Six years after the country's shadow-banking sector blew up, pockets of stress are building again, prompting firms to start pulling back amid scrutiny from the Reserve Bank of India (RBI).

Bajaj Finance, India's largest non-banking financial company (NBFC), joined rivals including Shriram Finance, Mahindra & Mahindra Financial Services, and IIFL Finance that posted higher delinquencies on unsecured loans in their second quarter earnings reports. Most firms also set aside more capital for provisions and had lower profits than expected.

The "Goldilocks" moment for lenders riding the wave of demand for loans from retail customers while maintaining clean balance sheets may have clouded. These firms are grappling with an increase in bad loans, margin compression and intense competition for deposits, according to bankers and analysts.

RBI Governor Shaktikanta Das said last month that even though the overall sector remains healthy, there are outliers who pursue an "imprudent, growth-at-any-cost approach," which is counter-productive. A week later, the central bank stopped new loans at four shadow banks.

NBFCs accounted for 15 per cent of assets in the financial system as of March 2023, according to the RBI. While these lenders boost profits through higher interest rates on loans, they're more vulnerable to defaults when the economic cycle turns, according to Moody's Ratings.