The banking sector is poised to see an uptick in co-lending arrangements between banks and Non-Banking Financial Companies (NBFCs) following the Reserve Bank of India (RBI) Governor Shaktikanta Das's call for shadow banks to reduce their reliance on bank funding. This shift is anticipated to be particularly notable among smaller and mid-size NBFCs, as co-lending offers a cost-effective alternative to raising funds from the bond market.
Umesh Revankar, Executive Vice Chairman of Shriram Finance and Chairman of Finance Industry Development Council (FIDC), a representative body of NBFCs, highlighted that co-lending allows NBFCs to source loans while banks handle the underwriting process. This approach enables smaller NBFCs, lacking substantial balance sheets for bond issuance, to diversify their funding sources.
Expressing concerns about the increasing interconnection between banks and NBFCs, Governor Das urged NBFCs to broaden their funding sources and reduce their reliance on bank funding. Over the last five fiscal years, the share of NBFCs' borrowing from banks has consistently grown, reaching Rs 12.3 trillion as of September 2023, compared to Rs 5.5 trillion in September 2018, according to a Crisil report.
Co-lending not only offers cost advantages to NBFCs but also aligns with the RBI's emphasis on broadening funding sources. Raising funds from the bond market tends to be more expensive, with the bond market typically 25-50 basis points costlier than bank lending. The regulatory comfort with co-lending arises from the fact that credit underwriting is handled by the banks.
While larger NBFCs may find it easier to tap the debt market, smaller NBFCs face challenges in raising funds through bonds. Diversifying funding sources for NBFCs could also include allowing more of these companies to accept deposits, providing an additional avenue for raising funds at lower costs.