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India’s shadow banking sector likely to face shake-up after default

By Krishna N. Das and Neha Dasgupta

NEW DELHI (Reuters) – India’s burgeoning shadow finance sector is likely to face a shake-up after defaults at one major lender battered the nation’s financial markets in the past week and reinforced worries about credit risk.

Industry officials and experts say they expect Indian regulators to cancel the licenses of as many as 1,500 smaller non-banking finance companies because they don’t have adequate capital, and to also make it more difficult for new applicants to get approval.

The Reserve Bank of India (RBI), which has been tightening rules for non-banking financial companies (NBFCs), did not respond to requests for comment.

Better capitalized and more conservatively run finance firms are likely to swallow up an increasing number of smaller rivals, the experts said. That could make it difficult for many small borrowers to get loans, especially in the countryside where two-thirds of India’s 1.3 billion people live, and put the brakes on a surge in private consumption with a knock-on effect on growth.

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