Bank credit to the non-banking finance companies (NBFC) sector has registered a year-on-year (YoY) growth of over 30% in each of the past six months, the latest Reserve Bank of India (RBI) data showed.
According to the data, while banks’ non-food credit grew 15.9% YoY to Rs 134.1 trillion in February, credit to NBFCs rose 32.4% to Rs 13.09 trillion during the same period. Data show that banks’ credit to NBFCs started growing by upwards of 30% since September 2022, registering a 35.5% Y-o-Y growth in December and 31% rise in January. Lending to NBFCs now constitutes 10.5% of overall non-food credit outstanding, according to a research report by ICICI Securities.
Officials at NBFCs said the rise in banks’ loans to non-bank lenders is primarily driven by their need to meet priority sector lending targets. “…The RBI has come up with guidelines on co-origination and co-lending by banks. This has come as a big relief as well as a bright opportunity for banks to meet their priority sector targets. Banks have quickly adapted these guidelines and formulated policies to join hands with NBFCs, resulting in 30%-plus growth in lending to NBFCs,” said Jugal Mantri, executive director and chief executive officer at Anand Rathi Global Finance.
Umesh Revankar, executive vice-chairman at Shriram Finance, told FE that banks have also become a “little too large” now. He said the retail strength of lenders reduces when they become large sized, and they incline to focus on wholesale loans.
“Banks have become a little too large now…When your size becomes large, your retail strength comes down, you tend to do more of wholesale lending rather than retail lending. Even though they want to do retail, they do not have the infrastructure to do it,” Revankar said, adding that banks’ credit growth to the NBFC sector will likely outpace the non-food credit growth and remain upwards of 20% in the current fiscal.
Krishnan Sitaraman, senior director and deputy chief rating officer at CRISIL, said there is also a partial impact of th base effect playing out in the February credit growth figures. “A little bit of that 30% (credit growth)-plus is also a base effect. If you look one year back, credit growth to NBFCs was not that significant. NBFCs also benefitted from the rebound in economy and their credit growth has also touched double-digits in FY23 and is expected to improve in FY24 as well. So, NBFCs’ demand from the banking sector has gone up,” Sitaraman said.
“Other angle here is also a shift from the bond markets to the banking sector. In bond markets, interest rate increases, in terms of borrowing cost, have been higher than the banking sector and also a number of investors in the bond markets may not be comfortable with certain types of NBFCs…,” he added.
Sustainable growth?
Going ahead in FY24, banks’ loan growth to the NBFC sector will likely moderate to above 20% due to higher-rated NBFCs shifting borrowing towards capital markets, experts said.
Jinay Gala, associate director at India Ratings & Research, said in the previous year, banks’ interest rates were lower compared to capital market rates, as transmission of RBI’s 250-bps repo rate hike was faster in capital markets than in bank loans.
“Now, things are changing for higher-rated NBFCs, many of them will find borrowing from the capital market better than borrowing from banks.They have a good amount of arbitrage to go to the capital markets compared to banks. The RBI has also guided higher-rated NBFCs to conduct 25% of their incremental borrowing from capital markets…,” Gala said.
Sanjay Agarwal, senior director at CareEdge Ratings, said bank credit to NBFCs may also moderate on account of such exposure reaching sectoral limits. “… the exposure of banks to NBFCs is growing very fast, it was Rs 4.5 trillion in 2018, and today, it is almost Rs 13 trillion. We feel there could be a small bit of moderation in NBFC growth itself because 2022 was a year of exuberance and it is not expected to continue for two-three years continuously. Some of the banks are supposedly having issues in sectoral limits to NBFCs…,” he said.