India’s crackdown on financial risks puts industry on watch

 week after India barred lenders from investing in alternative investment funds that hold stakes in their borrowers, the market is counting the cost.

The Reserve Bank of India said the move is designed to prevent an unstable build-up of assets in the country’s financial system. But, lawyers and analysts say alternative investment fund managers could see costs ramp up and the rules will make it harder to raise cash in the future.

“This is a sledgehammer to the industry,” said Vinod Joseph, partner at Economic Laws Practice, a legal firm.

The top seven shadow lenders in the country had invested around $1.35 billion in these so-called AIFs, according to their most recent annual reports. Shares of these firms dived after the new rules, that directed existing investments to either be liquidated in 30 days or for lenders to provision their investment in the AIFs.

The RBI’s move added to jitters in the market. Sentiment was already shaken after the central bank last month imposed stricter rules to stem the relentless rise in risky consumer loans, actions called “draconian” by one analyst. Its report on financial stability risks is set to be released this week.