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Mutual fund exposure to the debt instruments of non-banking finance companies (NBFCs), which was on a declining trend, has witnessed a slight uptick at the end of the third quarter of the current fiscal.
Amid underlying asset quality concerns and risk aversion due to a spate of high-profile defaults, mutual funds have been cutting down their exposure to the debt instruments of non-banking lenders over the last two years.
From a combined exposure of ₹2.65-lakh crore to corporate debt (bonds and NCDs) and Commercial Papers (CPs) of NBFCs in July 2018, mutual funds’ exposure to these instruments fell to ₹1.33-lakh crore as of April 2020.
High-profile defaults
A series of high-profile defaults starting with IL&FS, followed by DHFL, Altico Capital, Reliance Home & Commercial Finance and Reliance Capital, have heightened the risk aversion among debt mutual funds and asset management companies (AMCs) towards NBFC debt instruments.
In its latest ‘Report on Trend and Progress of Banking in India 2019-20’, the Reserve Bank of India said: “NBFCs mobilise resources largely via debentures and bank borrowings. With the IL&FS default and the related downgrade cascade, market access shrank and NBFCs’ reliance on banks for funds continued to rise.”
According to the report, bank borrowings of NBFCs on a year-on-year basis grew by 13 per cent to ₹7.08-lakh crore as on March 2020 from ₹6.26-lakh crore a year ago. On the other hand, NBFC fundraising through commercial papers fell by 56 per cent to ₹89,065 crore (₹1.59-lakh crore) during the same period.
“In 2020-21 (up to September), market confidence revived and NBFCs’ borrowings from banks and FIs accelerated, buoyed by the various policy measures taken by the Reserve Bank and the government to combat Covid-19 impact,” the RBI added.
As per latest data, mutual fund exposure to NBFC debt instruments increased to ₹1.47-lakh crore as of December 2020 against ₹1.33-lakh crore as of April. Within this, exposure to bonds marginally dipped to ₹89,410 crore as of December 2020 (from ₹89,678 crore in April), while exposure to commercial paper increased to ₹58,079 crore (₹44,096 crore) during the same period.
However, the combined exposure of ₹1.47-lakh crore as of December 2020 is still lower than the ₹1.64-lakh crore recorded in December 2019 and ₹2.30-lakh crore in December 2018.
According to CARE Ratings’ debt market update, the overall commercial paper issuances (as per the RBI) in December 2020 rose to ₹1.89-lakh crore, which is 5 per cent higher than the corresponding month last year. Financial services / investment sector alone accounts for 23 per cent.
“The cost of borrowing via commercial paper fell to 3.35 per cent in December by 11 bps lower than the previous month and 2.15 per cent than the corresponding period last year. There has been a broad-base decline in the cost of borrowings across NBFCs, HFCs, AIFs and non-NBFC categories on a month-on-month basis,” the report added.
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