India’s shadow banking crisis raises spectre of contagion

At the turn of the millennium, a group of entrepreneurs in their twenties banded together in a cramped office near a New Delhi bus terminal to start what they hoped would be India’s answer to Charles Schwab.

Almost two decades later, founder Sameer Gehlaut — the son of a politician and army officer, once dubbed India’s youngest billionaire — and longtime executive Gagan Banga have more than achieved their dream, turning their company Indiabulls into one of the country’s most prominent financial groups.

Today, Indiabulls comprises a non-bank financial company, or shadow bank, with $17bn in assets and a real-estate developer. It has thrown its weight behind eye- catching projects such as the construction of India’s tallest building and the Mandarin Hotel in Mayfair. “They came out of nowhere,” said one Mumbai-based executive.

But the group’s success has been overshadowed in recent months by a growing crisis in India’s shadow banks, whose problems investors and analysts increasingly fear could spark contagion among conventional banks and real-estate companies and cause a broader financial crisis.

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Shares of Indiabulls Housing Finance have fallen about 50 per cent since late September after the central bank blocked an attempted merger with a local bank, cutting off an important source of financing. A court, meanwhile, also agreed to hear a lawsuit alleging that Indiabulls misused funds — claims the company strenuously denies.

“We took on the big daddies of that time,” Mr Banga said, referring to the company’s rise. “It’s not the first time that we’ve been hurt.”

The woes at Indiabulls come only a year after the collapse of another shadow bank, IL& FS, sparked panic known as India’s “Lehman moment”. With the funding crunch since spreading to many of India’s 10,000- odd NBFCS — which are broadly less regulated than conventional banks — analysts say last year’s scare may not be a one-off.

A Reserve Bank of India report estimated that the failure of the largest NBFCS or housing finance companies could cause defaults in up to two banks. Nervousness about the financial sector rose this month after the RBI, responding to troubles at a small co-operative bank, issued a statement that the “Indian banking system is safe and stable and there is no need to panic”.

“It’s only a matter of time, if things are not resolved, that we’ll start to see bigger defaults in the sector,” said Saswata Guha, Fitch’s head of financial institutions in India. “There’s a risk of contagion which may flow through [NBFCS] and also banks. It’s very hard to say how this will unravel.”