Amid RBI concerns over a high share of bank lending, non-banking finance companies (NBFCs) owed close to 57% in Q2FY24 (similar levels in FY22) to banks followed by 18.6% (17.3% in FY23) to MFs and 16.6% (17.6% in FY22) to insurance companies. The share of MFs and insurance companies has been broadly declining for several quarters but has held steady for the last couple of quarters, according to CareEdge Ratings.
The share of Banks has remained the highest although it declined marginally in Q2FY24 compared to March 2023 but remained higher than June 2023 level and the share of MFs increased marginally in the same period. If the funding mix is considered, the share of SCBs would be even higher due to the significant loan asset sell-down (direct assignment) as a funding source which is not included in the above computation.
The credit exposure of banks to NBFCs stood at Rs 14.9 lakh crore in November 2023, indicating a 21.5% year-on-year (y-o-y) growth, a tad slower than the rate witnessed in October 2023 and the approximately 30% average growth for the prior 12 months. Furthermore, the proportion of NBFC exposure in relation to aggregate credit has risen from 9.5% in November 2022 to 9.6% in November 2023. On a month-on-month (m-o-m) basis, the amount rose by 1.2%.
Concerned over high bank lending to NBFCs, the central bank had raised risk weights on bank loans to NBFCs by 25% last year.
Changing mix
The composition of larger NBFCs has started to change a bit as they have tapped the capital market, while mid-sized and smaller NBFCs unable to access the capital market at cost-effective rates have continued their reliance on the banking system as the primary source of funding. This can be seen in the choice of instruments in the funding mix of NBFCs which shows an increasing reliance on long-term loans (from SCBs and AIFIs) while that of Long-Term debt instruments (from insurance companies and MFs) continues to moderate.
Investment in corporate debt of NBFCs declined by 3% y-o-y and 4% m-o-m to Rs.0.63 lakh crore in November 2023. Meanwhile, the share of total corporate debt to NBFCs compressed to 3.9% in November 2023 from 4.1% in November 2022. The outstanding investments in CPs of NBFCs remained below the Rs one lakh crore mark, remaining essentially flat at 0.1% growth sequentially but increasing by 24.3% y-o-y to Rs.0.92 lakh crore in November 2023. CPs (less than 90 days) rose by 17.0% y-o-y to Rs.0.66 lakh crore in November 2023, CPs (90 days to 182 days) increased by 96.1% to Rs.0.22 lakh crore, and CPs (more than 6 months) declined by 40.3% to Rs.0.04 lakh crore in the reporting period. The percentage share of funds deployed by MFs in CPs as a percentage of banks’ exposure to the NBFCs stood at 6.2% in November 2023, increasing by around 14 bps y-o-y. The proportion of CPs (less than 90 days) deployed in NBFCs as a percentage of aggregate funds deployed for less than 90 days reached 9.5% in November 2023 as compared to 6.9% over a year ago period, the percentage of CPs (90 days to 182 days) rose to 14.5% from 8.1% over a year ago, and CPs (greater than six months) percentage decreased to 4.6% in November 2023 as compared to 5.8% over a year-ago period.
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