Public Financial Institutions (PFIs) are increasing their exposure to bank credit. PFI borrowing from banks has jumped close to 29% (y-o-y) in November compared to 6% a year ago. In the past two months, it has risen 23%, according to the Reserve Bank of India’s (RBI) sectoral deployment data. The outstanding credit stood at Rs 2.53 lakh crore as on November 30.
Yield Disconnect
“The yields have stayed elevated in the bond market and have not declined in line with rate cuts. This pushed PFIs to move to bank credit for cheaper funding. High-rated entities can avail cheaper EBLR loans, where transmission happens faster,” said Sachin Sachdeva, vice president – Financial Sector Ratings, ICRA. Despite cumulative 125 bps rate cut, yields stay elevated due to various factor including demand-supply mismatch and expectation of no more rate cuts.
State-owned entities have been scrapping their bond issuances amid higher yields. Recently, National Bank for Agriculture and Rural Development (NABARD) cancelled its Rs 7,000 crore bond issuance. On December 24, Power Finance Corporation (PFC) scrapped Rs 6,000 crore issuance for the third time. Entities such as Small Industries Development Bank of India (SIDBI) and Indian Railway Finance Corporation (IRFC) have also cancelled issuances in the past, citing the same reason.
An official at a state-owned entity said they are more focused on domestic loan market currently as it gives them a better pricing compared to debt market and overseas borrowing.
Flight to Quality
“For banks, PFIs is one of the pockets for growth. By funding them, they ultimately support infrastructure, especially in the renewable energy space. These are the sectors which are seeing a significant growth compared to general corporate capex.” Sachdeva added. He said, “Banks are more comfortable in lending to PFIs given their high ratings, compared to low rated NBFCs.”
The overall bank credit to non-banking finance companies have also improved since October. The growth in bank lending to NBFCs and unsecured retail is showing signs of revival, the RBI said in its Financial Stability Report released on Wednesday. The bank lending to NBFCs grew 9.5% YoY in November compared to 7.5% a year ago, the data showed.