Banks’ exposure to debt of NBFCs rose 25.8 per cent yoy to ₹13.8 lakh crore in August 2023. This took the share of NBFC credit, as a percentage of total bank credit, to 9.3 per cent from 8.8 per cent a year ago.

“Large NBFCs focused on the capital market, while mid-sized and smaller NBFCs continued their reliance on the banking system as their primary source of funding,” CareEdge Ratings said in a note, adding that it is reflective of the robust growth in NBFC balance sheets and AUM during and post the pandemic.

“The credit extended by banks to NBFCs has exhibited a consistent upward trend over the last five years and continued its acceleration along with the phased reopening of economies after the Covid-19 pandemic. This growth momentum further accelerated during FY23 and has continued in first half of FY24,” the note said.

Compared to February 2018 numbers, Absolute bank lending to NBFCs has jumped to around 3.5 times compared with February 2018. Over the same period, the share of banks’ advances to NBFCs has more than doubled from around 4.5 per cent in February 2018.

The rising reliance of NBFCs on banks for funding has been a cause of concern given ballooning unsecured retail credit portfolios of NBFCs. High exposure to such entities also leads to banks having more indirect exposure to high-risk, unsecured portfolios beyond their own lending in these segments.

The RBI, on Friday, cautioned banks and NBFCs on the unprecedented growth in unsecured retail loans, and asked them to build their internal risk mechanisms and guardrails. The central bank also advised lenders to be vigilant and grow their books sensibly to avoid any future asset quality challenges.

NBFCs, the largest net borrowers of funds from the financial system, owed close to 57 per cent in FY23 to banks, followed by 17.3 per cent  to MFs and 18 per cent to insurance companies.

“The share of MFs and Insurance companies has been broadly declining for several quarters but has held steady for the last couple of quarters. The share of Banks has remained the highest,” CARE said, adding that the actual share of banks would be higher if loan asset sell-down (direct assignment securitisation) is included.

“The aggregate dependence of mid-sized NBFCs on the banking sector for funding is likely to remain high while larger NBFCs will continue to move towards the capital markets,” it said.

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