The cost of funds for non-banks could rise 200 to 300 basis points as banks squeeze funding to this segment. Recent data show that bank funds to the non-bank segment dropped to 15% in April from 22% seen in the same period last year.
Non-banks are also likely to face a squeeze on their margins and profitability as they access more expensive sources of borrowing. Bank funding to non-banks accounts for more than half of their overall borrowings.
“Bank loans to non-banking financial companies have decreased sharply after the RBI increased -weighted assets on bank loans to NBFCs,” said Suresh Ganapathy, head of financial services research at Macquarie Capital.
“Banks fund almost 50% of NBFC credit through direct loans and subscription to bonds. So a squeeze in bank funding does have implications for NBFCs growth as well as margin prospects.”
In November last year, the banking regulator directed banks and non-banks to reserve more capital as weights for loans disbursed towards unsecured personal loans, credit cards and lending to NBFCs. This was done to rein in the inordinate rise in such loans.
According to a note by brokerage house Motilal Oswal, margins for vehicle financiers have bottomed out but are expected to remain in that range because of the rising borrowing costs. Housing finance companies have also exhibited compression in their margins, which is putting pressure on yields.
The cost of funds is also on the rise as market borrowings by non-banks gain ground. As per a report by CARE Ratings, mutual fund debt exposure to NBFCs, including commercial papers (CPs) and corporate debt, crossed the ₹2 lakh crore mark in April 2024 after 55 months. The last time the exposure was above ₹2 lakh crore was in August 2019.
Mutual fund debt exposure to non-banks witnessed an increase of 29.8% on-year and 9.7% sequentially, with CPs remaining above the ₹1 lakh crore mark for five consecutive months.
The CP outstanding stood at ₹1.18 lakh crore, a level last witnessed nearly five years ago in May 2019.
Meanwhile, bank lending continues to cool off. Data show the proportion of NBFC exposure in relation to aggregate bank credit reduced from 9.7% in April 2023 to 9.4% in April 2024, while mutual fund debt exposure to NBFCs rose to 13.4% as a percentage of banks’ advances to NBFCs in April 2024 from 11.9% in April 2023, and sequentially from 12.2% in March 2024.
“The growth rate of advances to NBFCs has been below the overall bank credit growth since December 2023. This is the impact of RBI’s increasing weights and elevated capital market borrowings,” said Sanjay Agarwal, senior director at Care Ratings.
