Macroeconomic factors such as rising interest rates, increased loan delinquencies and more stringent financial regulation are felt around the world and India is no exception.  It has been a key mission of the Indian government to clean up the balance sheets of Indian banks, in order to provide increased stability to the Indian banking sector, and this has broadly been demonstrated by a consistent period between 2013 and 2024 where levels of bad debt fell.

India's more resilient and profitable banking sector is critical for it's long term growth.  However, some analysts are pointing to Non-banking Financial Companies (NBFCs) as a risk to market stability.  NBFCs are subject to much lower regulatory constraints, often extending or “evergreening” loans to borrowers to allow them to pay off existing loan facilities. 

The Reserve Bank of India issued fresh risk weights and capital requirements for NBFCs last year and this could be indicative of a trend of greater regulation to deal with the shadow banking sector. It would be potentially damaging to the market to create a stringent and restrictive regulatory environment, which squeezes liquidity and limits borrowing.  However, a largely unregulated shadow banking sector has the potential to act as a drag on economic growth, which India can ill afford.  

Sustained growth in spite of a challenging macro environment will be crucial to India's long term economic performance.  It will be fascinating to see how NBFC credit risk is managed over the next few years.  As with others in the market, the Reed Smith India business team will watch the next steps with interest.