Those who are awash in cash paint capital. Those who have adequate capital are thirsty for liquidity.
That, in a nutshell, is the story of India's financial crunch, and the surest way to ease it will require tapping Indians living overseas.
In the past, New Delhi has resorted to such special hard-currency deposit programs to balance over-of-payment difficulties. A notable instance was in 1998, after India invited U.S. sanctions by testing a nuclear weapon.
The non-profits would have to be expensive now because the interest rates have risen significantly since the taper tantrum of 2013, the last time India nudged its banks to target the diaspora. The rupee: Easing a tight liquidity situation could be a worthwhile motivation.
As much as $ 39 billion of publicly traded Indian shadow financiers' rupee obligations, a fifth of the total, will mature between now and September, according to data compiled by Bloomberg. Rolling thesis on new commercial paper, bonds and loans would be expensive; and in some cases, impossible: The nonbank lenders' perceived credit quality has swooned over the past few months, ever since one of them – the highly rated Infrastructure Leasing & Financial Services Ltd. group – started defaulting on debts.
If the liquidity is not available for shadow lenders, it could be shaky. As Dhwani Pandya of Bloomberg News, Citing data from JM Financial Ltd., nonbank lending to India's real-estate firms at 2018, compared with 5 percent for bank advances. Should builders struggle to find a way out, they may have slash prices, and sell land holdings. If even then borrowers can not service their debts, those defaults could be further chill lending.
While loans to developers could not be the first ones, they may not be the only ones. Those against property, a popular source of funding for small businesses, could also pose a risk to finance companies if borrowers' prepayments dry up.
A typical loan against property in India has a tenure of 10 to 15 years, but gets prepaid in three to five, according to Moody's Investors Service. That has allowed them to finance them by rolling over short-term borrowings without much of a glitch. Shadow lenders' asset-liability gaps could balloon. Then their ultimate source of financing – money-market mutual funds – would evaporate.
Loss of shadow lenders in recent years. The way to do it would be to buy traditional deposit-taking banks to buy.
State Bank of India, the country's largest lender, has earned its annual target for buying loan portfolios of non-bank financial firms. SBI has a common equity Tier 1 ratio of 9.8 percent, adequate to provide for bad and aspire for some growth, according to India Ratings & Research Pvt., A unit of Fitch Ratings. Most of SBI's other state-run peers have abundant deposits to deploy, but not many have the capital. A $ 200 billion tsunami has been depleted.
One of the state-controlled banks would be to buy shadow loans. Where would New Delhi get the funds, given to already stretched budget deficit?
The money could come from nonresident Indians. There's already talk of tapping the diaspora to prop up the rupee, Asia's worst-performing currency this year. Typically, dollars are raised by state-run banks as deposits. But they do not need those now. Instead, the twin deficiencies of liquidity and capital will be disposed of. And in the process, the rupee, too, gets a new leg to stand on.
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Capital-starved state-run banks can pay handsome coupons, while the government can indemnify investors against the risk that their money would forcibly be converted into equity. That protection against a "bail in" is currently offered informally.
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Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He was a columnist for Reuters Breakingviews. He also worked for the Straits Times, ET NOW and Bloomberg News.
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