Banks lending to the non-banking financial companies (NBFCs) has gone up by about ₹10-lakh crore in the last five years even as mutual funds cut their exposure as they singed their hands due to a string of defaults in the sector during this period.

According to RBI data, outstanding bank credit to the NBFC sector increased from ₹3.68-lakh crore at the end of December 2017 to ₹13.20-lakh crore as of December 2022. 

In the current fiscal too, the overall bank credit recorded a 15 per cent year-on-year growth to ₹133-lakh crore as of December 2022 despite significant rise in interest rates in the last few months, and heightened global uncertainties.

Rating agency Care Edge said, “The credit growth has been robust in FY23 driven by personal loans, (unsecured personal loans, housing and auto loans), higher demand from NBFCs due to cost optimisation & requirement for their own growth, higher working capital requirements due to elevated inflation, and depreciation of Indian rupee.” 

Within the overall bank credit, incremental loans under ‘non-food credit’ went up by ₹17.57 lakh crore between December 2021 and 2022. Out of this, lending to NBFCs alone accounted for ₹3.5-lakh crore, or 20 per cent of the incremental bank advances during this period. Outstanding credit to the NBFC sector grew by 36 per cent year-on-year as of December 2022. 

Mutual Funds shy away

On the other hand, Mutual funds have been staying away from the NBFCs due to a spate of high-profile defaults that rocked the sector in 2018-19. As of December 2018, mutual funds exposure to NBFC debt instruments (including commercial paper and non-convertible debentures) stood at ₹2.31-lakh crore. 

However, mutual funds reduced their exposure to NBFCs after the default of IL&FS in 2018, which was followed by several other NBFCs default, including DHFL, Altico Capital, Reliance Home & Commercial Finance and Reliance Capital. As of December 2022, mutual fund’s exposure to NBFCs stood at ₹1.43-lakh crore. 

Growth in bank credit to NBFCs also declined in the aftermath of the defaults. From 55 per cent year-on-year growth as of December 2018, growth in bank credit to NBFCs came down to 28 per cent as of December 2019 and fell further to 8 per cent as of December 2020 due the Covid-19 pandemic-led disruptions.

Market borrowings and banks constitute over 75 per cent of NBFC borrowings. Following liquidity crunch on both fronts due to Covid-19 pandemic, RBI conducted two phases of targeted long-term repo operations (TLTRO) to help ease liquidity stress in the sector.  

“The distribution of TLTRO funds under the first two phases suggests that ₹61,586 crore was disbursed to NBFCs and Housing Finance Companies (HFCs), of which 60 per cent were obtained by NBFCs,” RBI said in its August 2021 bulletin. Bank credit to NBFC has since picked up momentum recording a 36 per cent year-on-year growth as of December 2022. 

Vinay Pai, Head - Fixed Income at Equirus, said before the IL&FS default, commercial paper issuance was as high ₹12.34-lakh crore, with an outstanding of ₹5.84-lakh crore as of September 2018. “Post events (of default), fund managers have been cautious about their investment in NBFCs. Most NBFCs also diversified their portfolio by reducing concentration risk with more focus on retail lending.”

Kedar Karnik, Vice President, DSP Mutual Fund, said the investor preference has also substantially shifted towards target maturity funds (TMFs) from fixed-term plans. “Credit risk fund category has also shrunk in the past few years leading to reduced exposure from MFs,” he said.

Care Edge said Personal Loans and NBFCs have been the key growth drivers of bank credit in FY23. However, it added that slowdown in global growth due to rising interest rates, and rate hikes in India could impact credit growth going forward.