Moderation In Bank Direct Lending To NBFCs At Rs 1.7-1.9 Tn In FY25: Icra

Bank direct lending to non-banking finance companies (NBFCs) in the upcoming financial year (FY25) is anticipated to range between Rs 1.7 trillion to Rs 1.9 trillion, according to the Investment Information and Credit Rating Agency (Icra). In the current financial year (FY24), incremental direct bank lending to NBFCs amounted to Rs 1.61 trillion over a ten-month period.

Icra notes a moderation in bank credit to the NBFC sector in recent months, projecting future constraints due to internal sectoral limits and the Reserve Bank of India's (RBI) increase in risk weights for bank exposures to NBFCs. The RBI's decision to raise risk weights by 25 per cent in November 2023, particularly for exposures below 100 per cent, reflects regulatory apprehensions regarding the rapid pace of bank lending to NBFCs.

As of January 2024, outstanding bank loans to NBFCs totaled Rs 15.03 trillion, with banks extending Rs 3.08 trillion to finance companies in FY23, significantly lower than the Rs 73,831 crore in FY22.

The estimated incremental direct bank lending for FY25, ranging between Rs 1.7 trillion to Rs 1.9 trillion, is expected to meet approximately 33 percent of the total base case incremental funding requirements of the sector (Rs 5.3 trillion to Rs 5.5 trillion) for FY25. This marks a slight decrease from the 38 per cent of incremental funding requirements met through direct lending in FY24.

Over the past three to four years, private banks have expanded their share in overall bank exposures to the NBFC sector. However, tighter liquidity conditions, intensified competition in deposit mobilisation and the necessity to improve credit-deposit (CD) ratios may impact private banks' participation in the near term. This could subsequently affect credit flow to financial firms, including housing finance companies, unless public sector banks increase their exposures.