📰Shadow Banks

Hello. Happy Monday. The Reserve Bank of India is cracking down on shadow banks that they fear are getting working people into debt traps. By doing so, the RBI could be doing more harm than good. We’ll investigate, and then close with Gupshup, a round-up of the most important headlines.

Also, our Future of India event has been moved from November 7 to Wednesday, February 12, 2024. Buy tickets now: https://www.samosacapital.com/future-of-india-fall-2024.

BTW: India was the first country to mine what precious gemstone? (Answer at bottom)

Markets

Read here for an appendix on the above.

Analysis

RBI Continues Banning Shadow Lenders, Sending Chills Through The Industry

Arohan Financial Services, which provides microloans and lending services to underprivileged Indian women, has delayed an upcoming $200 million IPO after the Reserve Bank of India told it and numerous other shadow banks to halt new loan issuance.

Two of the four lenders under scrutiny have prominent backers. DMI Finance Pvt. is partly owned by Japan’s Mitsubishi UFJ Financial Group Inc., while Navi Finserv Ltd. was founded by billionaire Sachin Bansal, a co-founder of Flipkart, which was later acquired by Walmart Inc. These are significant players: last financial year, DMI disbursed $2.25 billion in personal loans, household appliance financing, and small business working capital, funded by banks and investors who purchased securities backed by pooled loans. Navi’s portfolio reached $1.3 billion in June, with 89 percent being digital personal loans; on Monday, the company canceled a planned bond issuance.

Manappuram Finance, another microlending service, saw its shares drop 21 percent over three days after the RBI’s crackdown announcement.

The RBI’s main concern is the potential for a subprime crisis, where household borrowers could become trapped in unsustainable debt cycles. The RBI has described certain lenders as “guilty of non-adherence” to guidelines on assessing household income and considering existing monthly repayment obligations. Additionally, Indians are among the highest users of short-term loans from shadow banks globally — thus, these loans have become a lifeblood instrument of India’s economy. While some lending practices have been suboptimal, the majority of credit issued thus far has addressed essential financial needs.

Is the RBI’s strategy working?   The difficulty of measuring India’s existing monthly repayment obligations also clouds the RBI’s analysis. The ILO found that only 26 percent of Indians have long-term career contracts with measurable income. Households are stuck in a vicious cycle where blue-collar workers have lost real wages and can only get financing from private lenders who will actually service them. Those lenders have to charge usurious rates to be adequately compensated for the risk but blue-collar employees have no better alternative. 

The RBI’s ability to analyze India’s credit market is hindered by the challenge of accurately measuring existing monthly repayment obligations, especially given the informal nature of employment for most Indians. According to the International Labor Organization (ILO), only 26 percent of Indians hold stable, long-term jobs with predictable income, leaving the majority of households in a cycle of financial strain. Moreover, the ILO also found that real wages for salaried workers has dipped by 1 percent every year from 2012 to 2022, unveiling households' immense financial stress. 

To offset the higher risk of lending to this vulnerable group private lenders charge exorbitant interest rates, creating a cycle in which low-income workers are burdened by debt but lack viable alternatives. This dynamic highlights a structural issue in India’s lending market, one that compounds economic stress for the working class and complicates the RBI’s regulatory role.

If private lenders were given interest rate caps or outright banned (similar to the four that faced this already) worsening borrowers would flock to unregulated sources. Ironically, the RBI has shifted more risk to poor borrowers through the halting of lenders since losses those lenders absorb could affect other borrowers. If IPOs and other financings were still happening, private lenders would have capital to protect against losses rather than standing on a house of cards. 

The RBI has also failed to address the root cause of the rise of shadow banking and lending: overregulation of financial institutions and their balance sheets. Most of India’s major banks are publically run and are far more likely to issue bad loans that bring immense risk to the broader financial system. These banks are also prone to become a drain on India’s government budgets by constantly requiring bailouts. Privately-run banks, on the contrary, tend to issue far healthier loans while being profitable. The crowding out of privately run banks in Indian markets has forced people and businesses to seek shadow banks, which are less regulated but still monitored under the RBI safety blanker. Now, with growing weakness in shadow banks, those customers are more likely to seek unregulated and black market loan services: In attempting to shield people from debt traps, the RBI may inadvertently be pushing them toward them.

Read also: India should privatize its banks, former RBI leaders argue.

Macro

• Emerging market equities gained as Israeli attacks on Iran were less severe than anticipated. Analysts were concerned attacks would cause severe oil shocks, which would disproportionally hurt emerging economies. The MSCI equity gauge is up 30 basis points since Friday but still on course for a near 3 percent loss for the month. Citi dropped expectations for oil prices to $60 citing fading risk premium.

Equities

• Bharti Airtel reports a lower-than-expected profit. Bharti dropped in profit due to a one-time charge on currency devaluation in certain business groups. The charge, valued at $102 million (₹8.54 billion), resulted in Bharti falling short of analyst expectations by the same amount. Nonetheless, Bharti nearly tripled its net income compared to the previous year, driven by rising demand and a 10 percent increase in average revenue per user. (BBG) 

• Swiggy is looking to kick off a $1.35 billion (₹113.4 billion) IPO next week. The IPO will open for bids on November 6 with shares debuting on November 13th. Swiggy partners with nearly 200,000 restaurants around India to deliver food with key rivals being Amazon, Zomato, and Tata’s BigBasket. (BBG)

Alts

• Bain-backed 360 One WAM plans on raising $357 million (₹30 billion) for its largest private credit fund. The firm’s fifth fund plans on investing in performing credit of large and mid-sized companies looking to expand. (Moneycontrol)

Policy

• US sanctions make Indian banks wary of trading with Russia according to Denis Alipov, Moscow’s envoy to India. While India did not follow suit with other Western countries in adding sanctions to Russia, individual entities in India can be barred from US business if in violation of American sanctions. Alipov told reporters that BRICS and other world members should have a higher say in global economic issues. 

• Canadian authorities accused Lawrence Bishnoi of colluding with the Indian government to attack Canadian citizens, fueling rising tensions between the two nations. Canada has characterized Bishnoi as a major arms dealer leading a global syndicate that collaborated with the Indian government to target dissidents abroad. Previously, Bishnoi had strong ties to Sikh militant groups, making it particularly ironic that he is now accused of targeting those very groups. (Al Jazeera) 

• Leader of Opposition, Rahul Gandhi, steps up allegations that the majority party, BJP, is protecting SEBI chief Buch. Buch was accused of wrongfully taking money from ICICI bank and holding shares of unlisted companies, and also for protecting Adani Group from investigations, by Hindenburg Research. (Economic Times)

Oh, and the practice of mining diamonds began in India in the 4th century BCE. The oldest known reference to diamonds comes from a Sanskrit text called "The Lesson of Profit" (Arthasastra), written by Kautiliya between 320 and 296 BCE.

See you Wednesday.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1 USD = 84.07 Indian Rupee