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Synopsis

* The credit exposure of banks to Non-Banking Financial Companies (NBFCs) stood at Rs 13.8 lakh crore in August 2023, indicating a 25.8% year-on-year (y-o-y) growth. This expansion is indicative of the robust progress observed in NBFCs during the post-pandemic period. Furthermore, the proportion of NBFC exposure in relation to aggregate credit has risen from 8.8% in August 2022 to 9.3% in August 2023. On a month-onmonth (m-o-m) basis, the amount rose by 0.6%.

* Meanwhile, the Mutual Fund (MF) debt exposure to NBFCs, including Commercial Papers (CPs) and Corporate Debt, witnessed an increase of 35.8% to 1.77 lakh crore in August 2023 with CPs remaining above the one lakh crore threshold last seen in August 2019. Based on discussions with market participants, the trend is likely to continue. 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. However, given the general credit risk aversion of MFs, the exposure to NBFCs, particularly those rated below the highest levels, is not expected to witness significant growth. Consequently, 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.

* Highlighting the relative size of their exposure to NBFCs, MFs' debt exposure to NBFCs touched 12.8% as a percentage of “Banks’ advances to NBFCs” in August 2023 from 11.8% in August 2022 and 13.1% in July 2023.

Figure 1: Summary of Banks Loans and MFs NBFC Debt Exposure (Rs. lakh crore)

The data in Figure 1 does not include liquidity made available to NBFCs by banks via the securitisation route (direct assignment & pass-through certificates) and Treasury investments made by banks in the NBFCs’ capital market issuances. Liquidity availed by NBFCs including HFCs through the securitisation route was approximately Rs 1.8 lakh crore for the twelve-month period ending September 2023.

Figure 2: NBFC Debt Sources (Rs lakh crore)

Compared to February 2018 numbers, absolute bank lending to NBFCs has jumped to around 3.5x, meanwhile, MF exposure has reduced by 23.5% over the last five years due to risk aversion by mutual fund managers. Interestingly, MF exposure to NBFCs as a share of Debt Assets Under Management (AuM) has reduced from nearly 20% in the later part of 2018 to around 12%, on the other hand, the share of banks’ advances to NBFCs as a share of aggregate advances has doubled from around 4.5% in February 2018 to over 9% in August 2023 indicating the reliance of NBFCs on bank lending.

Figure 3: Growth in Bank Credit to NBFCs vis-à-vis overall Bank Credit Growth

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. This trend can be primarily ascribed to the expansion in the AuM of NBFCs.

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