(More Bank Opinion) – It's time for Indian policymakers to recognize the real problem of the country's ghost banks. What they are living is no longer a shortage of vanilla cash; the whole industry is crushed against a wall of mistrust.

On the other side of this wall are a group of wealthy real estate developers and their middle-class clients, as well as a multitude of poor people. Everyone is at risk.

A crisis of confidence has increased the borrowing costs of the financiers themselves. The excess return over government securities required by the A rated corporate bond market is three standard deviations above the five-year average.

The collapse of the highly rated group of financial operators and investors, IL & FS, has revealed the dividing lines under the impressive credit edifice of Indian banks. Non-bank lenders have contributed 30% of all economic advances over the past three years, with one-fifth of their financing coming from commercial paper and non-convertible short-term debentures, most of which have been finalized. through investment-friendly mutual funds.

The panic attack caused by the sudden failures of the IL & FS in September made financing markets cautious. If the concerns concerned only liquidity, they should have already disappeared. However, the borrowing costs of fictitious financiers refuse to budge. This is despite the authorities that sequestered the debt of $ 12.8 billion of IL & FS in a bankruptcy process; inject $ 33 billion of sustainable cash into the banking system; bring together state lenders to buy the assets of finance companies; and replace a fierce central bank governor with a former public servant willing to lower interest rates and reduce risk weights for bank advances to specialized lenders.

But why stop at lenders? Their borrowers also deserve special attention. As I have indicated recently, ghost banks such as Dewan Housing Finance Corp., whose share price has fallen by 84% since early September, are now at risk of overflow by being forced to reduce their exposure to the construction sector. Real estate analyst Liases Foras estimates that the 90 largest Indian builders need $ 6 billion a year to service their debt, while they earn just over $ 3 billion before interest , taxes and depreciation. Refinancing from ghost banks is essential for their survival. Real estate bankruptcies would affect the balance sheets of non-bank lenders.

Collateral damage can include the poor of India. Microfinance lenders are only beginning to turn the page on the November 2016 ban imposed by Prime Minister Narendra Modi on most banknotes. At the time, women who borrowed small amounts of money to sew, deliver food, or buy flowers were paralyzed by the collapse of their business, which yielded only money. The current rate for weaving gold threads into a sari has fallen to Rs 4,000 ($ 56) from Rs 7,000. Defects have become commonplace. Companies like M Power Micro Finance Pvt. canceled bad debts and given new advances to help women entrepreneurs get back on their feet. When I recently visited one of the company's collection centers in Thane, a suburb of Mumbai, only 146 accounts out of 4,000 were overdue. About half of them remained unpaid for less than 90 days.

Despite demonetization, access to credit at the bottom of the pyramid has been one of India's successes in recent years, largely following the Grameen Bank's model of lending to women's groups in Bangladesh. . While lenders had been foreclosed earlier by the lack of credit histories, it is now mandatory to report loans to registries such as the Equifax Indian Unit Inc. or its rival TransUnion CIBIL.

The availability of data has led to faster and cheaper customer acquisition and better risk management. institutions generally fear the first borrowers who already have two existing lenders. Someone who has paid off a loan finds that it is easier to appeal to three credit providers. The effectiveness of recoveries at Bharat Financial Inclusion Ltd., which merges with a bank, has returned to 99.7% on loans granted after the lifting of the monetary ban crisis.

Given the nervousness in the financing markets, it will not be easy for micro-lenders to increase their own funds. In a country like Thane, borrowers have a choice of half a dozen credit providers. Spreads are regulated. Rates of 25% plus interest rates on microloans can not continue to increase with the cost of capital of lenders if the base rate of conventional banks does not increase as well.

The story continues

Starting loans and selling them as securities to better capitalized institutions such as the State Bank of India is an option. But the smallest financiers can not get rating companies to certify that loan losses in portfolios will remain low. Although the solvency of the poor is high, it is vulnerable to natural disasters, political interventions such as agricultural debt cancellation and political disasters such as demonetization.

The net result could be a tightening of credit standards and a reduction in new credits. Adding value from selling vegetables or making papadums may not be important for GDP, but increasing consumption from small firms – for example, for demand two-wheelers – would become painfully obvious if it were to disappear. This is one more reason to make up for the financing gap of parallel banks.

To contact the author of this story: Andy Mukherjee at amukherjee@More Bank.net

To contact the publisher in charge of this story: Matthew Brooker at mbrooker1@More Bank.net

This column does not necessarily reflect the opinion of the Editorial Board or More Bank LP and its owners.

Andy Mukherjee is a More Bank Opinion editorialist covering industrial companies and financial services. He was previously a columnist for More Bank Breakingviews. He has also worked for the Straits Times, ET NOW and More Bank News.

For more articles like this, go to More Bank.com/opinion

© 2019 More Bank L.P.