The turmoil in the NBFC space over the past year has hit the flow of funds into the commercial sector. According to the handbook of statistics on the Indian economy released by the RBI recently, the flow of funds into the commercial sector grew by a muted 6.8 per cent in 2018-19 to Rs 22 lakh crore, after a sharp 44 per cent jump in the previous fiscal.

The steep slowdown in the flow of resources is due to a fall in funds from non-banks during 2018-19. While funds through bank credit (non-food) grew by a robust 34 per cent to Rs 12 lakh crore, resources from non-banks shrunk by 15 per cent to Rs 9.8 lakh crore in 2018-19.

The IL&FS and DHFL episodes that shook the NBFC sector, snowballed into a liquidity crisis for NBFCs and HFCs last year. While it is well-known that disbursements by many players took a hard knock, the aggregate picture painted by the RBI’s statistics reveals the extent of the pain. For instance, within non-banks, net credit by housing finance companies fell sharply by 25 per cent in fiscal 2019, after a steep 60 per cent jump in the previous year. Flows from systematically important non-deposit taking NBFCs (net of bank credit) turned negligible (negative Rs 4,500 crore) in 2018-19, after a robust Rs 3 lakh crore of funds flow in 2017-18.

Interestingly, while non-bank domestic resources shrunk, businesses appear to have made a beeline for external commercial borrowings (ECB). Funds through ECBs shot up to Rs 69,600 crore in 2018-19, after three years of negative flows. Foreign direct investment (FDI), too, saw a significant 19 per cent jump to Rs 3 lakh crore in 2018-19, after falling for two consecutive years.

Fall in share

In 2015-16, bank credit constituted a little over half (53 per cent) of the flow of resources to the commercial sector. In the subsequent years — 2016-17 and 2017-18 — the share of banks fell, while that of non-banks went up sharply to 66 per cent and 56 per cent respectively. In 2018-19, the share of non-banks had fallen to 45 per cent.

Within non-banks, the share of domestic sources has fallen to 27 per cent of total funds flow into the commercial sector in 2018-19, down from 40 per cent in the previous year. Public issues by non-financial entities, net credit by HFCs, systematically important non-deposit taking NBFCs and LIC's net investment in corporate debt, infrastructure and social sector --- all have fallen in the 2019 fiscal.

But tight liquidity conditions in the domestic market and risk-aversion from domestic lenders has led companies to look for alternative options in the overseas market.

RBI’s slew of measures easing up ECB norms over the past year, has also led to a sharp spike in such borrowings. For instance, at the beginning of the year, the RBI had drawn up a new ECB framework, allowing all eligible borrowers to raise up to $750 million per financial year under the automatic route, replacing the existing sector-wise limits.

After shrinking for three consecutive years, funds raised through ECBs shot up in 2018-19, leading to Rs 69,600 crore of resources flowing into the commercial sector

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