Bank lending to non-banking finance companies (NBFCs) jumped by around 3.8 times in around five-and-a-half years even as mutual funds cut exposure to NBFCs by 31.4 per cent to mitigate risk.
The credit exposure of banks to NBFCs stood at Rs 14.8 lakh crore in October 2023, indicating a 22.1 per cent year-on-year (y-o-y) growth. NBFC exposure of banks was just Rs 3.90 lakh crore in February 2018, registering a rise of 279 per cent in over five-and-a-half years. This expansion is indicative of the robust progress observed in NBFCs during the post-pandemic period, according to CareEdge Ratings report.
MFs’ exposure to NBFCs fell from Rs 2.31 lakh crore in 2018 to Rs 1.58 lakh crore by October 2023.
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Interestingly, MF exposure to NBFCs as a share of debt assets under management (AUM) has reduced from nearly 20 per cent in the later part of 2018 to around 11 per cent. On the other hand, the share of banks’ advances to NBFCs as a share of aggregate advances has doubled from around 4.5 per cent in February 2018 to close to 9.6 per cent in October 2023, the report said.
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 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 sequentially, albeit maintaining the y-o-y growth rate. In September 2023, the quantum of outstanding exposure reached the pre-merger level and in October 2023 moved past the same, the report said.
The RBI has prescribed an increase in risk weights for advances to AAA-A-rated NBFCs by 25 per cent, while higher risk weights would not be applicable for entities in the BBB+ and below rating categories. This excludes the risk weights for bank loans to HFCs or bank loans backed by PSL loans. Further, around 40-50 per cent of the current outstanding would fall in this category meanwhile as the notification is silent on covering the outstanding loans or whether only fresh loans would be subject to these norms, the report said.
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Furthermore, the proportion of NBFC exposure in relation to aggregate credit has risen from 9.4 per cent in October 2022 to 9.6 per cent in October 2023. On a month-on-month (m-o-m) basis, the amount rose by 4.0 per cent.
Meanwhile, the MF debt exposure to NBFCs, including Commercial Papers (CPs) and corporate debt, witnessed an increase of 21.9 per cent to Rs 1.58 lakh crore in October 2023, while declining sequentially by 10.5 per cent from September 2023.
Highlighting the relative size of their exposure to NBFCs, MFs’ debt exposure to NBFCs remained at 10.7 per cent as a percentage of “Banks’ advances to NBFCs” in October 2023 and October 2022, but declined sequentially from 12.5 per cent in September 2023.