BENGALURU/MUMBAI (Reuters) – Shares of Indian mortgage lender Dewan Housing Finance Corp Ltd (DHFL) plunged as much as 18% on Thursday after two major credit ratings agencies categorised the company’s commercial paper at default levels, fanning fears of growing distress in the country’s shadow banking sector.

ICRA, an affiliate of Moody’s, and Standard & Poor’s local unit CRISIL on Wednesday downgraded DHFL’s commercial paper to their lowest level after the lender, a part of the country’s troubled shadow banking sector, missed payments on bonds which were due this week. That implied DHFL was nearing or in default already.

The struggles of the NBFC sector pile additional pressure on Prime Minister Narendra Modi, who won a strong election mandate last month, even as the economic growth slipped to 5.8% in the January-March quarter, marking the lowest GDP growth rate in more than four years.

Reserve Bank of India (RBI) Governor Shaktikanta Das said on Thursday that the central bank would take “necessary steps if and when required with regard to non-bank finance firms.”

He said the RBI was closely monitoring the situation at DHFL, in reply to a query at a press briefing after the RBI’s decision to cut its key policy rate on Thursday.

“The RBI will not hesitate to take whatever steps are required to ensure that financial stability is not adversely impacted in any manner,” said Das.

Analysts say NBFCs may face an uphill task to redeem up to 1 trillion rupees ($14.44 billion) due in the next three-four months. These concerns make it expensive and difficult for these firms to raise funds through commercial paper, and have driven up overall borrowing costs for the sector.

CRISIL said its ratings downgrade of DHFL was driven by low visibility in raising funds and its belief that liquidity levels would remain subdued.

DHFL, which last month also stopped taking new deposits and blocked premature withdrawals, said it found the rating action “extremely surprising”, adding that it was taking steps to ensure there were no defaults on any of its obligations.

“This is a delay and not default,” the company said in a statement late on Wednesday.

DHFL said it was taking all necessary steps to ensure that due interest payments are made within the seven-day grace period.

Following the rating downgrades, some Indian debt mutual fund schemes with exposure to DHFL have taken a significant hit as they marked down their investments, leading to a steep decline in their net asset values this week.

Analysts at Macquarie Research said DHFL missing payments would not create a second round of sell-off, adding that stress was pocketed but would not freeze the system again.

The unfolding crisis, however, has again highlighted the deteriorating health of shadow banks in India. Last year, the government took control of Infrastructure Leasing and Financial Services after its defaults triggered fears about contagion in the financial sector.

There are more than 10,000 shadow banks, or so-called non-banking financial companies (NBFCs), in India with a combined balance-sheet of about $304 billion.

NBFCs typically raise short-term funds through commercial paper and lend for long-term purposes such as housing loans and infrastructure projects. The sudden surge in their borrowing costs, however, has caught the sector off guard and highlighted an asset-liability mismatch on their books.

The squeeze has also played a big role in denting economic growth, as NBFCs had in recent years evolved into major lenders to the real estate, small business and infrastructure sectors, with lending growth from state-run banks slowing due to bad debt woes.

Shares of DHFL ended down nearly 16% at 93.95 rupees. The stock has fallen nearly 85% since mid-September when the IL&FS crisis spooked investors in the NBFC sector.