Hi everyone,  

Welcome to the 136th edition of The Pattern, a weekly where we dive into the latest from the world of economy, technology and finance. Let’s get started. 

Grip too strong?  

Recently, I came across a headline, and it caught my attention. Shriram Finance Ltd has gone offshore and borrowed $1.28 billion in a multi-currency social loan, making it the biggest-ever offshore facility by an Indian shadow lender. This comes amidst a significant regulatory shift here in India. 

According to reports, Shriram Finance will split the deal across multiple currencies: the dollar, euro, and dirham. The tenors in the deal ranged from three to five years. This loan is part of a wider trend we're seeing this year, where Indian shadow banks have increasingly turned to international markets for funding.  

But why this sudden shift? 

It all boils down to one thing: the RBI tightening of local loan regulations. The RBI began cracking down on high-interest loans and tightening lending norms for shadow banks. This has made it harder for Indian lenders to secure capital domestically. And now, we're seeing them flocking to offshore markets to fill the gap. 

The big question  

NBFCs play a huge role in India's growing economy. They provide capital access to individuals and businesses that might not qualify for traditional bank loans. However, NBFCs have been scrutinized for their lending practices, especially regarding high interest rates and rule violations. The RBI has become strict on lenders that charge exorbitant rates or don't follow the proper procedures for assessing borrowers' ability to repay loans. 

In fact, recently, the RBI ordered several of them, including DMI Finance and Navi Finserv, to halt issuing new loans due to non-compliance with regulations. RBI Governor Shaktikanta Das even sternly warned about a "growth-at-any-cost" approach without proper risk management practices. As a result, the four major lenders were penalized for violating microfinance loan rules. This has put considerable pressure on these lenders, leaving them to look beyond India's borders for capital. 

The bigger trend  

This isn't a one-off occurrence. Shriram Finance is just the latest example of a growing trend. Other major players, including Annapurna Finance Pvt and Credila Financial Services Ltd, have recently tapped into the offshore loan market.  

But why the sudden rush to offshore markets? With India's financial sector under more regulatory pressure, it's becoming increasingly harder for shadow banks to rely on local funding sources. Offshore markets provide them more flexibility and financial leeway, especially when local capital becomes scarcer. 

The ripple effect  

The RBI's regulatory crackdown is not only aimed at tightening the controls on shadow banks' practices. It also addresses rising concerns about increasing defaults in the sector. 

For example,  Bajaj Finance , one of India's largest NBFCs, reported a rise in its non-performing assets to 1.06% in the September 2024 quarter, up from 0.91% the previous year. This uptick in defaults reflects a broader trend of rising delinquencies across the industry, particularly in unsecured lending segments like personal loans and credit cards. 

RBI is concerned about how household debt is climbing and how good the assets in the financial system really are. These rising defaults signal that borrowers struggle to repay loans due to economic pressures, rising prices, and higher interest rates. The outstanding bank credit to NBFCs stood at  Rs 15.36 trillion  in October 2024 compared to Rs 14.44 trillion in the same month last year. As a result, lenders are tightening their underwriting standards, re-evaluating their lending strategies, and increasingly turning to international markets for financing. 

The offshore dilemma  

These loans often come with more attractive interest rates than domestic borrowing. They also offer longer tenors, allowing shadow banks to manage cash flows and invest in long-term projects. Offshore borrowing allows them to diversify their funding sources, reducing reliance on increasingly risk-averse domestic banks. 

Offshore loans certainly bring their own set of risks, too. They're often denominated in foreign currencies. This might expose shadow banks to currency fluctuations and add significant volatility to their balance sheets during global economic uncertainty. 

The RBI's stand  

So, is the RBI's decision to toughen up the regulations on shadow banks the right move? In the long run, yes. The RBI is right to step in and regulate the sector to ensure consumer protection and financial stability. The RBI aims to maintain a healthy financial system by cracking down on high-risk lending. However, these measures have slowed down loan growth in the short term. CRISIL ratings  projects a drop from 23% to 15-17% this fiscal year. Moreover, this crackdown has left Indian shadow banks no choice but to seek riskier offshore financing, which could expose them to new vulnerabilities. 

The balance between regulation and growth is delicate, and only time will tell whether the RBI's approach proves to be the right one for India's evolving financial landscape. 

Reading List:  

1. QR code frauds double in 2 years  

2. Micro fin impacted by confluence of factors, last quarter of pain, say executives  

3. Only 6.68% of population filed income tax return in 2023-24 fiscal  

4. Banks struggle to meet SEBI's cybersecurity deadline amid new regulations  

5. Bad loans of peer-to-peer lenders more than double to Rs 1,163 crore in FY24  

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates. 

Cheers, 

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.