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Banks have been lending more to non-banking financial companies (NBFCs), increasing their overall exposure to them, according to CARE Ratings.
This comes in the backdrop of decline in both the total monthly funds raised by NBFCs from the primary market and the external commercial borrowings (ECBs) registrations in financial services.
Outlook for NBFC-HFC sector remains ‘negative’, says ICRA
The credit rating agency assessed that banks’ outstanding exposure to NBFCs registered a growth of 42.5 per cent in absolute terms from September 2018 (₹5.5 lakh crore) to October 2020 (₹7.8 lakh crore).
However, the aforementioned data does not include liquidity made available to NBFCs by banks via the securitisation route (Direct Assignment & Pass Through Certificates).
The overall composition of NBFCs in bank credit increased from 6.9 per cent in September 2018 to 8.5 per cent in October 2020 and remained stable on month-on-month/m-o-m basis (8.7 per cent in September 2020), CARE Ratings said in a note.
RBI lists eligibility criteria for NBFCs to declare dividend
However, growth in bank credit to NBFCs has registered a downward trend due to the base effect, risk aversion in the banking system due to the Covid-19 pandemic and due to investment by banks in NBFCs through capital market instruments supported by the Reserve Bank of India/Government of India, it added.
Total monthly funds raised by NBFCs from primary market stood at ₹0.2 lakh crore in October 2020 as compared with ₹0.8 lakh crore in March 2019, as banks became the major source of their financing needs following the NBFC crisis.
Furthermore, ECB registrations in financial services declined to $0.43 billion, (21.0 per cent of total ECBs registrations) in October 2020 as compared to $1.35 billion (66.0 per cent of total ECBs registration) in October 2019.
In the aftermath of liquidity stress post IL&FS and DHFL events, the market funding conditions turned difficult for NBFCs.
“Recently, the RBI has extended scheme to stressed sectors by making available funds to banks. The liquidity covers of NBFCs will be largely dependent on collections and the ability to raise resources,” the agency said.
However, amidst this tough time, banks have been lending more to NBFCs, increasing their overall exposure to them. The agency observed that with economic activities picking up, the collection efficiency has gradually improved for large NBFCs in September and October 2020.
Bond yield down
The agency said the weighted average yield of corporate bond issuances in the primary market declined in October 2020 by 47 basis points (bps) to 6.48 per cent compared with the previous month (6.95 per cent in September 2020) and 60 bps lower than that in April 2020 (7.08 per cent). It was, however, 162 bps lower than 8.10 per cent in September 2019.
On the other hand, the cost of borrowing for NBFCs stood stable to 5.98 per cent (m-o-m) and 174 bps lower y-o-y whereas that of Housing Finance Companies increased by 89 bps (m-o-m) to 6.93 per cent and fell by 104 bps on y-o-y basis.
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