India sees a shadow-banking boom despite China’s funk

By Andy Mukherjee

Not all shadow banks are born equal. Just as nonbank lenders in China face a liquidity crunch because of their linkages with troubled property developers, their counterparts in India are moving into a higher gear.

The trajectory of financiers, especially those who don’t take state-insured deposits, is beginning to diverge in the neighboring economies. In India, Mukesh Ambani’s Jio Financial Services Ltd made its stock-market debut Monday after being spun off from Reliance Industries Ltd., the tycoon’s flagship. The stock fell 5 per cent on the first day of trading because nobody knows what this brand-new business will do exactly. Still, the lofty $19 billion valuation suggests investors have great expectations.

Everyone is looking to the pace set by Bajaj Finance Ltd. The current market leader, worth 2 1/2 times its untested rival, is nearly four decades old and aiming for 29 per cent to 31 per cent growth in assets this financial year. Together, Bajaj and Jio are more valuable than State Bank of India, the country’s largest deposit-taking institution.

The contrast with China couldn’t be starker. Shadow banking took off in the People’s Republic in 2010. That’s when Beijing became wary of the credit bubble it had fanned to insulate the economy from the Global Financial Crisis. Banks sidestepped the ensuing regulatory squeeze by buying beneficial interests in trusts and calling them “amounts due” or “financial accounts available for sale” — anything but a loan that requires capital.

The trusts, which also raised money directly from rich investors and corporate treasuries, went on to lend to local government vehicles, property developers and other borrowers that couldn’t otherwise obtain traditional credit. But while Chinese banks have in recent years reduced their ties to these products, a real-estate slump is threatening their nonbank issuers.

As my colleague Shuli Ren explained recently, a trust product can hit its due date before the residential projects it had funded are completed or sold. Dozens of missed payments by Zhongrong International Trust, the first to sell overseas bonds, are spooking investors worldwide about a contagion risk, even though those concerns are likely overblown.

A similar shadow-banking crisis in India extracted a heavy price from the economy five years ago. Credit to real-estate developers all but dried up after the 2018 implosion of IL&FS Group. The collapse of the backer, owner and operator of infrastructure assets triggered a spate of other bankruptcies. Even Housing Development Finance Corp., the country’s largest specialist mortgage lender, swam to safety by merging recently with its offspring, HDFC Bank Ltd., a deposit taker.

All that turbulence is in the rearview mirror. The rapidly digitizing consumer economy is opening new growth vistas for financiers, especially those that can back their “fin” with some “tech.” Bank deposits are stagnant at the bottom of the pyramid, but excess savings of rich households and companies are available to nonbanks to chase yields. In the so-called blue-skies scenario considered by Investec Securities, Jio Financial may put together a loan book of as much as 1 trillion rupees ($12 billion) by 2030 — and draw a return of 6.5 per cent on assets.

Add reasonable leverage, and you are looking at return on equity of around 25 per cent, something that Bajaj is already delivering on more than $32 billion in assets. Worldwide, very few banks of that size are as profitable.

What will drive this boom? Data. Bajaj started off four decades ago by financing purchases of two- and three-wheelers made by the family’s main firm. Ambani can take off from a much shorter runway. He is India’s largest retailer and runs its biggest telecom company, which has been at the vanguard of the digitization that he now seeks to monetize.

Additionally, Ambani is using the cash flows from his legacy petrochemicals business to push into everything from cheap phones and laptops to selling his own brands of soap and soda. Every step of his vast supply-chain network has linkages with small firms that need finance. The consumer will want to buy everything now — and pay later. Settling bills is already highly digital in India, thanks to Unified Payments Interface, a smartphone-based public utility. Throwing credit into the mix is just one additional step. The homegrown Paytm app hawked more than $600 million of such third-party loans on its platform just last month, a 148 per cent jump from a year earlier.

Is Jio Financial India’s version of Ant Group Co., Jack Ma’s behemoth cut down to size by China? Perhaps. It could even become bigger — and more all-knowing about consumer behavior. The world never got to see Ant at its peak. The abruptly-pulled Hong Kong IPO in 2020 put paid to that. After authorities told Ant to open its payments app to competitors and sever “improper links” that steered users toward more lucrative services such as lending, Ant’s exceptionalism was gone.

India’s regulatory approach to national champions is likely to be much more benign by comparison. While the financial systems in both nations have been dominated by banks, the future that’s unfolding in India may de-emphasize the role of deposit-taking institutions, especially the smaller, government-controlled lenders that don’t have much of a technological edge. They may be reduced to acting as liquidity providers, begging to get in on lending opportunities with successful online platforms just to pay a decent rate to savers.

As long as India's shadow banks are careful not to get entangled with any one asset class like real estate, there’s no showstopper in sight.