NBFCs Shift to Banks for Funding Amid Market Volatility

Strategic Insights -

The Reserve Bank of India's (RBI) latest data indicates a 21% year-on-year increase in bank loans to non-bank lenders, totaling `11 lakh crore in May 2022. This surge is due to a sharp pullout of funds from debt mutual funds and rising funding costs in capital markets. Experts warn that this shift may lead to a skewing of borrowings towards banks, impacting small non-bank finance companies (NBFCs) that face crowding out and potentially higher funding costs.

Key Takeaways:

  • Bank loans to non-bank lenders touched `11 lakh crore in May 2022, a 21% year-on-year increase.
  • Mutual fund debt exposure to non-bank lenders dropped 3.4% to `1.5 lakh crore in the same period.
  • Small NBFCs may face crowding out due to the large quantum of borrowings to be raised by large NBFCs.
  • The sector may experience a compression in NBFCs' net interest margins ranging from 35-50 basis points, reflecting a rise of 90-100 bps in incremental funding costs.
  • Most NBFCs have 28% to 63% of borrowings from banks.
  • The sharp rise in repo rates may lead to a similar rise in repo-linked borrowing rates, impacting NBFCs' borrowing costs post the reset date.
  • Growth in bank credit to NBFCs witnessed a healthy growth of 11.2% in 2021-22 and has continued its upward trajectory, reporting a growth of 17.4% in April 2022 and 20.6% in May 2022.
  • Investments in corporate debt of NBFCs dropped by 18.1% on year to `74,000 crore in May 2022.
  • The percentage share of NBFCs to total corporate debt declined to 4.4% in May 2022 from 5.4% in May 2021.

Statistics:

  • Bank loans to non-bank lenders reached `11 lakh crore in May 2022, an increase of `1.87 lakh crore in 12 months.
  • Mutual fund debt exposure to non-bank lenders dropped 3.4% to `1.5 lakh crore in the same period.
  • Growth in bank credit to NBFCs grew 11.2% in 2021-22 and 20.6% in May 2022.
  • Investments in corporate debt of NBFCs dropped 18.1% on year to `74,000 crore in May 2022.
  • The percentage share of NBFCs to total corporate debt declined to 4.4% in May 2022 from 5.4% in May 2021.

Sources:

  • Reserve Bank of India (RBI)
  • Pankaj Naik, director at India Ratings
  • Sanjay Agarwal, senior director at CareEdge (formerly Care Ratings)
  • M B Mahesh of Kotak Institutional Equities