Bank credit to NBFCs grows 22% in Oct, exposure to sector at Rs 14.8 trn

Bank loans to non-banking finance companies (NBFCs) increased 22.1 per cent year-on-year in October, and their exposure to the sector was Rs 14.8 trillion in October 2023, according to a report by CareEdge Ratings.

Last month, the Reserve Bank of India (RBI) increased the risk weights for bank loans to higher-rated NBFCs (A and above) – a move aimed at moderating commercial banks’ exposure to the shadow banks.

“…the proportion of NBFC exposure in relation to aggregate credit has risen from 9.4 per cent in October 2022 to 9.6 per cent in October 2023. On a month-on-month (m-o-m) basis, the amount rose by 4.0 per cent,” CareEdge said.

Meanwhile, the Mutual Fund (MF) debt exposure to NBFCs, including Commercial Papers (CPs) and Corporate Debt, witnessed an increase of 21.9 per cent to Rs 1.58 lakh crore in October 2023, while declining sequentially by 10.5 per cent from September 2023.

The RBI norms on an increase in risk weights exclude bank loans to housing finance companies or bank loans backed by priority sector loans (PSL).

“The momentum of bank lending to NBFCs which are not covered by the PSL guidelines could likely moderate as this will likely impute higher cost of funds (due to higher risk weights) for entities rated A- and above,” the report said.

At the same time, the higher-rated NBFCs would drive towards the capital markets.

“Hence, aggregate dependence of mid and smaller-sized NBFCs on the banking sector for funding is likely to remain high (despite an anticipated increase in lending cost by 25-30 bps) while larger NBFCs will continue to diversify their funding sources,” the report said.

The credit extended by banks to NBFCs has exhibited a consistent upward trend over the last five years and continued its acceleration along with the phased reopening of economies after the Covid-19 pandemic.

The growth momentum further accelerated during the financial year 2023 and has continued in the first half of FY24. However, after the merger of HDFC Limited with HDFC Bank, the quantum of outstanding exposure of banks to NBFCs reduced sequentially, although maintaining the growth rate on a year-on-year basis.

In September 2023, the quantum of outstanding exposure reached the pre-merger level and in October 2023 moved past the same. This trend can be primarily ascribed to the expansion in the Asset Under Management (AUM) of NBFCs.

Investment in corporate debt of NBFCs rose by 11.1 per cent YoY to Rs 0.66 lakh crore in October 2023 but declined sequentially by over 15 per cent. Meanwhile, the share of total corporate debt to NBFCs rose to 4.1 per cent in October 2023 from 3.7 per cent in October 2022, the report noted.