IL&FS crisis may lead to consolidation of NBFC sector: Fitch

The report comes after RBI's decision to create a specialized cadre to monitor and regulate the financial sector, including banks and NBFCs.

The debt crisis in IL&FS has negatively impacted the growth of the Non Banking Financial Company sector in India and might lead to its consolidation, according to Fitch Ratings on shadow banking. (NBFCs) are commonly called as the shadow banking sector.

The report comes after RBI's decision to create a dedicated cadre to monitor and regulate the financial sector, including commercial banks and NBFCs.

The Indian shadow banking industry's rapid development and dependence on short-term funding sources "bubbled over" in 2018, most evident by the default of Infrastructure Leasing and Financial Services in September last year.

Default by IL&FS, it said, translated into higher borrowing costs and reduced market access for other non-bank financial institutions, leading to domestic regulators to re-examine liquidity norms for the sector and prod banks to increase their lending to, and asset purchases from, such entities.

"Fitch believes these dynamics will weigh on growth prospects for the sector and likely lead to industry consolidation," the report said.

The cash-strapped IL&FS group is sitting on a debt of about Rs 94,000 crore. The management of the company's board has been taken over a government-appointed director.

Several group companies have defaulted on the payment of interest payment on loans.

According to the report, the Indian shadow banking system had grown at a rapid pace over the last decade, with a particular spike in 2017 driven by finance companies providing asset finance and home loans and funds investing in infrastructure loans.

Non-bank growth, it added, was fuelled by accommodative funding market following demonetisation of high-value currency notes in November 2016.