INSUBCONTINENT EXCLUSIVE:
electrician and is struggling to make ends meet after a crucial road tunnel project shut down in Srinagar, Jammu and Kashmir.Construction of
the Z-Morh tunnel came to a halt two months ago after Infrastructure Leasing Financial Services (ILFS), one of the country's top
infrastructure funding companies which was helping build the project, stopped paying contractors in the face of a severe cash crunch."I have
no work since work on the project was stopped in July," said Mr Ahmad, 34, who was earning about Rs 30,000 ($413) a month.Hundreds of other
people working on the project are also out of a job because of non-payments by ILFS
The company has also defaulted on its debt obligations, roiling the markets and sparking worries of a credit crunch in the shadow financing
sector.The company's defaults have highlighted the risk of a sharp growth slowdown in the world's fastest growing major economy, as
lenders pare their exposure to the shadow banking space, or non-banking finance companies (NBFCs) in the country.NBFCs have played an
outsized role in lending growth in the economy in the last two years, and the sector's loan books have grown at more than double the pace
of the country's banks, that are currently saddled with about $150 billion of stressed assets."Raising money will become increasingly
difficult for NBFCs and that will push up the cost of borrowing for these companies and projects will slow down eventually, leading to a
broader slowdown in the economy than is currently priced in," said Ashish Vaidya, executive director and head of trading at DBS Bank in
Mumbai.A fall in economic growth would be a blow to Prime Minister Narendra Modi and the ruling Bharatiya Janata Party, which is already
under pressure from protests over rising fuel costs, as they prepare for key state elections in late 2018 and a national election due to be
held by next May.Rising ratesThe stress is evident in short-term interest rates as the Reserve Bank of India's dollar sales to stem the
rupee's fall have sucked up rupee liquidity and raised borrowing costs.One-year commercial paper has risen by 80 basis points to 9.30 per
cent since August and the one-year sovereign treasury bill rate is up 60 bps to 7.73 per cent, while the one-year overnight indexed swap
rate is at 7.50 per cent, indicating markets are pricing in a 100 basis points hike in the RBI's key repo rate going forward.The RBI has
raised its policy rate by 50 basis points this year to 6.50 per cent and most analysts expect it to raise rates for a third time next week
to stem inflationary pressure due to the sharp fall in the rupee.There are already signs that financing is suffering, and that could hit
capital spending.State-run Power Finance Co, Rural Electrification Corp and North Eastern Electric Power Corp have all scrapped debt
issuance plans this month as interest rates have surged.Higher rates and more risk-aversion among finance companies - especially when
combined with rising fuel prices - could also undermine consumer spending with items such as gold jewellery already being hit in the second
quarter.While the economy posted robust 8.2 per cent growth in the April-June quarter driven by strong consumption demand, it could see
growth drop below the RBI's projected 7.2 per cent rate for the fiscal year ending next March as credit conditions tighten, say
analysts."NBFCs have been a much higher percentage of system credit growth over the last few years, so a slowdown will hurt macro growth and
specifically consumption," UBS warned in a note on Tuesday.In the shadowsThe NBFCs' loan books grew 21.2 per cent in the fiscal year ended
In comparison, bank loans grew 10.3 per cent over the same period.Such rapid growth for the NBFC sector is fraught with risk, say analysts,
especially as many have raised funds via short-term commercial paper that needs to be rolled over.According to a Credit Suisse note on
Monday, 41 per cent of borrowings of NBFCs are maturing in the next six months and "any liquidity pressures will only add to the refinancing
risk of these instruments".Credit Suisse analyst Ashish Gupta said that mutual funds now owned an estimated 60 per cent of the overall NBFC
commercial paper issuance, which could exacerbate pains as redemption pressures at funds could cause yields of NBFC debt to spike further.To
contain ripple effects and ensure financial stability, the RBI may have to open a separate lending window for mutual funds through banks to
ease any cash pressures, according to a finance ministry official.While the RBI assured markets on Thursday of providing durable liquidity,
traders were concerned over the extent to which the liquidity deficit could go up to unless the central bank conducted frequent open market
bond purchases.Bond dealers expect the liquidity deficit - the extent to which banks need to borrow from the central bank to fund their own
lending - to rise to as much as Rs 3 lakh crore by March from Rs 1.5 lakh crore right now, pushing rates higher."The RBI should try to cool
down interest rates by proactively managing liquidity conditions," said the head of a debt mutual fund who asked not to be identified
because of the sensitivity of the comment
