Bank Lending To NBFCs Rises To 41%

Bank lending to non-banking finance companies (NBFCs) has witnessed a steady increase in recent years, with data from the Reserve Bank of India (RBI) revealing that as of March 2023, bank lending constituted 41.2 per cent of the total borrowings for NBFCs. This marks a rise from 39.6 per cent in March 2022 and 37.6 per cent in the previous year. Analysts attribute this trend to the challenges faced by smaller NBFCs in accessing funds from money markets. These smaller shadow banks find it more difficult to tap into funds through bond issuances due to their lower credit ratings.

In contrast, market borrowing by NBFCs has seen a decline, accounting for 38.8 per cent of total borrowings as of March 2023. This represents a downward trend from 41.0 per cent in March 2022 and 43.8 per cent in the previous year. The data suggests a shift in borrowing patterns, with NBFCs relying more on bank lending rather than market borrowings.

Weaker NBFCs face limitations in floating bonds and are primarily focused on securing funds from the cheapest possible sources. Commercial banks are more understanding of the local conditions and markets, making them a preferred funding option for these entities. Stronger NBFCs, on the other hand, have the luxury of choosing between tapping into the bond market or relying on banks to raise cheaper funds.

The reluctance of mutual funds to lend to NBFCs has also contributed to the increased reliance on bank lending. NBFCs previously relied on commercial papers and non-convertible debentures for credit supply, but the current scenario has witnessed a concentration of mutual fund exposure on higher-rated firms. Additionally, the external commercial borrowing (ECB) route, which was another significant source of credit for NBFCs, has become less attractive due to taxation and higher hedging costs.

During the pandemic, smaller NBFCs faced even greater difficulties in raising funding due to the higher risk perception associated with their operations. Experts emphasise the importance of developing a vibrant secondary market for bonds and commercial papers to enhance the Indian debt market. Implementing a refinancing mechanism for NBFCs, similar to the NHB refinance for housing finance, could also help reduce their dependence on bank lending. 

The funding pattern for NBFCs has shown a shift in recent years, with a reduced reliance on short-term borrowings and a greater focus on addressing asset-liability mismatches and maintaining liquidity coverage ratios as prescribed by the RBI. While banks remain significant lenders to NBFCs, exploring alternative funding options will contribute to a more balanced and sustainable funding landscape.