Banks’ loan exposure to non-banking financial companies (NBFCs) continues to grow rapidly, in what seems to be a counter-intuitive development, as need for liquidity leads these companies to utilise cash-credit limits and banks convert their investments in commercial papers (CPs) to loans.
Credit outstanding to NBFCs stood at Rs 6.35 lakh crore in June 2019, up 38% from a year ago, show latest data released by the Reserve Bank of India (RBI). Indeed, the increase in loans outstanding to NBFCs has been upwards of 35% year-on-year (y-o-y) throughout the first quarter of FY20.
Bankers insist they had never withdrawn support to well-rated NBFCs while at the same time admitting the loan growth is a result of a reblending in banks’ portfolios.
Punjab National Bank MD and CEO Sunil Mehta said while lending has not stopped altogether, it is more selective now. “When you know that you will not get any fuel in the road ahead, you will start stocking up now. So when the NBFC sector ran into problems, their liquidity requirement went up, even from a regulatory point of view. All of them — including those who were not availing their limits earlier — have started availing them.”
Also, many NBFCs which were lending long and funding it with short-term borrowings ran into rough weather when liquidity dried up. “They began to realise the short-term tap may not be available in the future. So, those commercial papers which were earlier investments with the banks have now been converted into loans,” Mehta said. Analysts say to get a better sense of the state of bank lending to NBFCs, one must look at incremental lending to the sector. Icra vice-president and sector head (financial sector ratings) Anil Gupta said on a y-o-y basis, growth looks high because of a relatively low base. “Between March 2019 and now, bank credit (disbursements) to NBFCs have been lower than in the same period last year,” he said. A third factor for bank exposure to NBFCs increasing is that the softening in bond yields has not quite translated into lower market borrowing costs for NBFCs. “NBFCs are preferring to borrow from banking sources, given that capital markets sources, like CPs and non-convertible debentures (NCDs), have really dried up for some of them,” Gupta said.