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. This growth momentum further accelerated during FY23 and has continued in the first half of FY24. Further, after the merger of HDFC Limited with HDFC Bank, the quantum of outstanding exposure of banks to NBFCs had reduced, albeit maintaining the y-o-y growth rate. In September 2023, the quantum of outstanding exposure has reached the premerger level. This trend can be primarily ascribed to the expansion in the AUM of NBFCs.
Huge growth
Compared to February 2018 numbers, absolute bank lending to Non-Banking Financial Companies (NBFCs) has jumped to around 3.5x, meanwhile, MF exposure has reduced by 23.5% over the last five years due to risk aversion by mutual fund managers.
Interestingly, MF exposure to NBFCs as a share of Debt Assets Under Management (AuM) has reduced from nearly 20% in the later part of 2018 to around 13%, on the other hand, the share of banks’ advances to NBFCs as a share of aggregate advances has doubled from around 4.5% in February 2018 to close to 9.5% in September 2023, according to Care Ratings.
“The credit exposure of banks to NBFCs stood at Rs 14.2 lakh crore (preHDFC merger number) in September 2023, indicating a 26.3% year-on-year (y-o-y) growth. This expansion is indicative of the robust progress observed in NBFCs during the post pandemic period. Furthermore, the proportion of NBFC exposure in relation to aggregate credit has risen from 8.9% in September 2022 to 9.4% in September 2023,” it said.
MF debt exposure
Meanwhile, the Mutual Fund (MF) debt exposure to NBFCs, including Commercial Papers (CPs) and Corporate Debt, witnessed an increase of 58.4% to 1.77 lakh crore in September 2023 with CPs remaining around the one lakh crore threshold. Large NBFCs focused on the capital market, while mid-sized and smaller NBFCs continued their reliance on the banking system as their primary source of funding. However, given the general credit risk aversion of MFs, the exposure to NBFCs, particularly those rated below the highest levels, is not expected to witness significant growth, it said. Hence, the aggregate dependence of mid sized NBFCs on the banking sector for funding is likely to remain high while larger NBFCs will continue to move towards the capital markets. Highlighting the relative size of their exposure to NBFCs, MFs’ debt exposure to NBFCs touched 12.5% as a percentage of “Banks’ advances to NBFCs” in September 2023 from 9.9% in September 2022 and 12.8% in September 2023.
Funding mix
NBFCs are the largest net borrowers of funds from the financial system and banks continue to account for the largest share of the same. Meanwhile, if the funding mix is considered, the share of SCBs would be even higher loan asset sell-down (direct assignments) as a funding source is included in the funding mix. The liability composition of larger NBFCs has started to change a bit as they tap 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.
