Indian Financial Sector is facing contagion Risk. Discuss the findings based on the report of S&P Global Ratings

The S&P Global Ratings in its report ‘Indian Financial Sector Braces for Fat Contagion Tail Risk’ has stated that a bank failure could disrupt the inter-bank market, payments, hurt credit availability and adversely affect economic growth.

Risks with Indian Financial Sector

• NPAs of Banks, default by IL and FS last year and Dewan Housing Finance Ltd (DHFL) this year and the inabilities of the bank to put DHFL into resolution process has put the financial sector at risk.
• The finance companies in India borrow substantially from banks. The failure of any large non-banking financial company or housing finance company may deliver a solvency shock to lenders .i.e. banks.
• The failure of NBFCs may result in other effects such as draining the credit available to the sector. The default by DHFL runs the risk of spreading to real estate companies too. Finance companies which are the largest lenders to this segment and any failure among such institutions could jeopardize credit flows to developers.
• Further, the finance companies have lost more than half of their equity value in the past year, and credit markets are charging huge premiums on debt issued by the riskier finance companies.
• S&P expects the government to support systemically important institutions that get into trouble.
• The Indian Finance Market has remained fragile after the default of IL&FS. Further a tight refinancing market and choppy equity markets are collectively making it difficult for institutions to raise capital.

The S&P Global Ratings urges the government of India to support a bank than letting a shaky credit system undermine the economy since a bank failure in the current market could exacerbate risks.