The Next Shadow-Banking Crisis in India

Just a year ago, India’s third-largest mortgage lender was bragging about how it had shrunk its financing costs by replacing bank loans with market borrowings. Now, Dewan Housing Finance Corp. is confronting the fallout of that seemingly clever strategy, one that many of its peers face as well: a dangerously high exposure to India’s struggling developers.

At the end of March 2018, Dewan had brought its cost of funds down to 8.4 percent, a reduction of almost 2 percentage points in three years. Like other Indian shadow banks, Dewan had ratcheted up sales of bonds and commercial paper to yield-hungry mutual funds, taking the share of debt-market financing to 40 percent from 28 percent. With their market shares slipping, banks, too, had no choice but to offer better terms. After all, this was an established, highly rated borrower expanding its liabilities by a compounded annual rate of 24 percent when there was very little demand for credit to put up new factories.