MFs' debt exposure to NBFCs rises 14.3% to Rs 1.7 trn in March: Report

Shift to short-term investments and IPO funding seen as reasons for trend, according to a report

Mutual funds’ debt exposure in the form of commercial paper (CP) and corporate debt (CD) to non-banking finance companies (NBFCs) rose by 14.3 per cent year-on-year (YoY) to Rs 1.7 trillion in March.

The growth was on account of the issuance of CPs by NB­FCs for funding investments in initial public offerings (IPOs) and shifting long-term to short-term investments as the market expected a hike in interest rates, according to a report by CARE Ratings.

The percentage share of funds deployed by MFs in NBFCs’ CPs stood at 4.4 per cent of debt assets under management (AUMs) in March, compared with 3.6 per cent last year.

Meanwhile, investments in corporate debt of NBFCs rose by 7.4 per cent YoY to Rs 97,000 crore in March. The percentage share too increased to 5.8 per cent in March from 5.6 per cent last year.

CPs deployed in NBFCs for less than 90 days, and 90 days to 182 days rose by 17 per cent and 31 per cent YoY to Rs 45,000 and Rs 11,000 crore, respectively, in March. However, CPs deplo­yed for 182 days to 1 year dro­pped 34 per cent to Rs 7,918 crore.

The proportion of CPs and corporate debt (182 days to 1 year) deployed together in NBFCs as a percentage of total debt funds increased to 17.2 per cent in March, as against 14 per cent last year, while the proportion of total debt funds increased to 10.3 per cent in March, compared with 9.2 per cent last year.

The credit exposure of banks to NBFCs fluctuated around the Rs 9-trillion-mark for the better part of the year and crossed the Rs 10-trillion threshold in December. It continued its upward trajectory in March as capital market rates hardened and NBFCs looked to avail of comparatively cheaper bank loans. However, overall borrowing cost is expected to become expensive as the Reserve Bank of India has raised rates and bond yields have risen in the capital market.