Rich or poor, everyone is at risk from the crisis in Indian shadow banks

A wall of mistrust threatens to feed through to microlenders, hurting the poor and dragging down consumption.

It’s time India’s policy makers acknowledged the real problem facing the country’s shadow banks. What they are experiencing is no longer a vanilla liquidity shortage; the entire industry has crashed against a wall of mistrust.

On the other side of that wall are a clutch of wealthy property developers and their middle-class customers, as well as teeming multitudes of poor. Everyone is at risk.

A crisis of confidence has made financiers’ own borrowing costs jump. The excess yield over government securities that the bond market is demanding from double A-rated firms is three standard deviations higher than the five-year average.

The collapse of