According to Nomura, the problems are so severe that growth may fall to 4.8 per cent in 2019-20.
Non-bank lenders are now facing a survival test. Total outstanding funding raised by NBFCs via banks and mutual funds rose just 9 per cent year-to-date in FY20 compared to a peak growth of 30 per cent in FY18.
In addition to this, with weak growth and rising credit risk, there is still wide differentiation among the shadow banks, both in terms of funding availability as well as cost, Nomura said.
Weakness across India's non-bank lenders, at a time when banks are still recovering from bad loans problem and corporations are deleveraging, has left the economy struggling with a "triple balance sheet" problem, Nomura Global Market Research said in a report on Friday.
As a consequence of such a critical issue facing the economy, GDP growth may fall to 4.8 per cent in 2019-20, wrote Sonal Varma and Aurodeep Nandi, economists at Nomura.
This forecast is the most pessimistic among the recent projections put out for India's GDP growth in the current year and well below the Reserve Bank of India's forecast of 6.1 per cent.
Nomura also said that it expects India's potential growth to remain near 6.5 per cent over the next five years if the underwhelming investment trend continues.
The key reasons for the downward projection are the triple balance sheet problem, weak global growth, macro policy easing being countered by transmission challenges and weak investment and jobs outlook due to a prolonged balance sheet deleveraging cycle.
On the other hand, while banks' bad loans may have peaked, they remain elevated and industries such as power, metals, mining, telecom, infrastructure and textiles remain "perilously" over-leveraged, Nomura said. The glacial pace of insolvency proceedings meant that much of the banking capital remained locked into bad loans, it said.
The slowdown is because of cyclical and structural reasons, some of which are on the demand side while others are on the supply side, said Nomura's chief India economist Sonal Varma.
"Among domestic factors, the broader economic slowdown has led to a drop in demand, causing capacity under-utilisation, and capping impetus for fresh investments," she said.
There is also evidence of accentuated joblessness, Varma said, while noting the absence of reliable and historically comparable data on employment in India. The government's latest Periodic Labour Force Survey for 2017-18 had pegged the unemployment rate at an elevated level of 6.1 per cent.
Citing data from the Centre for Monitoring Indian Economy (CMIE), Nomura said that real wage growth across corporations was negative in 2018-19. The rural sector too saw both agricultural and non-agricultural wage growth turn negative.
With poor job prospects and lower real wages, household savings have come off considerably in the past few years and lower levels of income have meant that households are increasingly relying on leverage to sustain consumption.
"Not surprisingly, consumption demand has slowed, which is reflected somewhat in the falling growth in revenues of fast moving consumer goods companies," Nomura said.
Part of India's slowdown is also due to weak global demand. The RBI estimates that every 0.5 percentage point decline in global growth translates to a 0.1-0.2 percentage point fall in domestic GDP growth, said Nomura.
Talking about to what extent will monetary and fiscal policy help revive growth, Nomura said that it depends on transmission, which is partially clogged.
The current cumulative 135 basis points of repo rate cut in this cycle has evoked only a 25 basis points fall in the deposit rate, a 2 basis points reduction in the base lending rate and a 45 basis points reduction in the marginal cost of funds-based lending rate (MCLR).
Higher credit risk spreads, higher small savings rates set by the government, a more rigid deposit profile and legacy loans standing at 30 per cent of outstanding loans linked to the more sticky base rate and especially weak bank balance sheets are responsible for the transmission, explained the research note.
The ensuing conditions, however, are likely to keep structural reforms going, Nomura said.
( With inputs from IANS )