The credit exposure of the banks to non-banking financial companies (NBFC) increased significantly in the last twelve months and the dependence of shadow lenders on the banking sector for funding is likely to remain very high going ahead, says a report by Care Ratings.
Banks’ outstanding credit to NBFCs rose by Rs3.09 lakh crore over the last 12 months and stood at ₹13.3 lakh crore in March 2023. This was primarily because the NBFCs’ additional borrowings moved to banks due to differentials between market yields and interest rates offered by banks.
On the other hand, mutual funds’ debt exposure to NBFCs fell 14.1% YoY to ₹1.46 lakh crore in March 2023, while increasing sequentially by 2.5% from February 2023 levels.
Absolute bank lending to NBFCs has more than tripled in the last five years, while mutual funds exposure has reduced by over a third over during the same period.
Banks’ credit to NBFCs started witnessing healthy growth in H2FY22 which continued its upward trajectory into FY23, data shows.
“This growth can be attributed to several factors, including the base effect, the improved financial position and growth visibility of NBFCs, and the fact that banks continue to offer more favourable rates compared to capital market yields," the report said.
As of March 2023, lending to NBFCs accounted for 17.3% of the incremental lending of aggregate credit.
As NBFC exposure as a percentage of aggregate credit increased to 9.7% in March 2023 from 8.6% YoY, certain banks may face difficulties in extending further credit to the NBFC sector as they move closer to the sectoral exposure norms, the report noted.
Meanwhile, in March 2023, the debt assets under management (AUM) of mutual funds decreased 10.4% YoY to ₹12.1 lakh crore.
“This decrease can be attributed to regular quarter-end outflows from liquid funds, the sustained popularity of equity funds, fixed-term plans (FMP) losing popularity, and alternate investment avenues," the report added.
Data shows that investment in corporate debt of NBFCs fell by 30.5% to ₹0.67 lakh crore in March 2023, while the percentage share of total corporate debt to NBFCs too declined to 4.4% from 5.8%, YoY.
Meanwhile, mutual fund share has declined for the last several quarters as they primarily maintain their exposure to NBFCs via market instruments.
“Further as and when banks fully transmit the rate hikes to their borrowers, market borrowing by NBFCs may increase as the spread between bank rates and market yields soften. Meanwhile, given the general credit risk aversion of MFs, the exposure to NBFCs, especially those rated below the highest levels is not likely to increase meaningfully. Hence, the NBFC’s dependence on the banking sector for funding is likely to remain very high," the report added.
This article taken by livemint.com
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