RBI's risk weighting hike: Mutual fund funding to NBFCs continues to grow

Stays above Rs 2 trillion mark for second consecutive month

The funding support from asset management companies to non-banking financial companies (NBFCs) has grown over the six months ending May 2024, following the Reserve Bank of India’s (RBI’s) hike in risk weights on bank loans to NBFCs in November 2023.

According to CareEdge Ratings data, total debt funds deployed in NBFCs via commercial paper and corporate debt rose from Rs 1.6 trillion at the end of October 2023 to about Rs 2.1 trillion by the end of May 2024.

Debt exposure to NBFCs, including commercial papers and corporate debt, rose by 22 per cent year-on-year (Y-o-Y) to Rs 2.09 trillion. This exposure has remained above the Rs 2 trillion mark for the second consecutive month.

 

Mutual funds’ (MFs’) exposure through investments in commercial papers, a short-term money market instrument of NBFCs, stood at Rs 1.15 trillion in May, a level last witnessed in May 2019 — five years ago.

Commercial paper exposure has consistently remained above the Rs 1 trillion mark for six consecutive months, according to the rating agency.

Bank loans to finance companies rose by 16 per cent Y-o-Y to Rs 15.6 trillion in May 2024. Bank credit to NBFCs was Rs 14.76 trillion in October 2023, according to RBI data.

In November 2023, RBI raised concerns about the extent of bank funding to NBFCs and increased risk weights on such exposures by 25 percentage points.

In May 2024, MFs’ debt exposure to NBFCs increased to 13.3 per cent of ‘banks’ advances to NBFCs’, up from 12.7 per cent in May 2023, even though it marginally decreased from 13.4 per cent in April 2024.

The rating agency noted that MF exposure to NBFCs as a share of debt assets under management reduced from nearly 20 per cent in late 2018 to around 13 per cent by May 2024.

Conversely, the share of banks’ advances to NBFCs as a share of aggregate advances doubled from approximately 4.5 per cent in February 2018 to 9.3 per cent in May 2024.