NBFCs Ride On Bank Borrowings For Financing Operations
Given the low interest environment and lags in monetary policy transmission, the reliance of NBFCs on bank borrowings increased.
India’s non-banking financial companies are increasingly relying on bank borrowings for funding.
An overview of data for the last two years and this fiscal shows that NBFC’s bank borrowings have increased, compared to other market borrowings.
As NBFCs grow, their retail credit demand also grows. In turn, their funding requirement rises, according to Anil Gupta, senior vice president and co-group head of financial sector ratings at ICRA Ltd.
Bank loans to NBFCs jumped 30.1% year-on-year to Rs 13.3 lakh crore as of March 24, according to Reserve Bank of India data. As of July, these loans rose to Rs 13.7 lakh crore.
In FY23, commercial paper issuances fell 36.5% to Rs 7.1 lakh crore, compared to Rs 11.2 lakh crore in FY22, as per Prime Database.
However, corporate bonds, as a source of funding, registered an uptick of 39.4% in FY22-23 to Rs 5.16 lakh crore, compared to Rs 3.7 lakh crore in FY21-22.
Given the low interest environment and lags in monetary policy transmission, the reliance of NBFCs on bank borrowings increased, according to a paper in the Reserve Bank of India’s September bulletin.
According to the central bank's scale-based regulation, NBFCs are classified into four layers depending on their size, activity, and perceived riskiness.
“While NBFC-UL (upper layer) overwhelmingly rely on secured borrowings, NBFC-ML borrow significantly via unsecured means,” the RBI paper stated. The analysis was based on a sample of 205 companies that have regularly filed returns in all quarters from December 2020 to December 2022.
The increased reliance on bank borrowings also stems from the fact that getting approvals from banks is now easier and faster, according to Jindal Haria, associate director, India Ratings & Research Pvt.
When it comes to the negotiating power between better rated NBFCs and banks, it is often in favour of NBFC (UL), Haria said. "This is mainly because it's a very competitive space and at the end of the day, every bank wants to lend. So, negotiating with banks is easier as even they are hungry for growth."
Another reason for NBFCs to rely more on bank borrowings is that the bond market may not be equally accessible to everyone, according to Anil Gupta.
However, a risk to this phenomenon is over-concentration of funding from one source, he said.
"Over-concentration on one source is never good. When an NBFC goes down, it creates a systemic issue as it can choke the credit supply in economy. They must diversify even if it means going for a marginally higher funding," Gupta said.
As per the RBI paper, NBFCs need to diversify their funding sources, thereby, reducing excessive reliance on bank borrowings.
Diversifying the funding source also helps NBFCs in managing their asset-liability maturity, according to Gupta. "To an extent, the (long-term) assets of NBFCs are floating in nature. But in a declining rate scenario, if you are stuck with a high-cost bond, there will be an interest rate mis-match," he said.
However, some banks are tightening their belts, as they have begun to hit sectoral caps in NBFCs and hence, there is push towards co-lending, off-balance sheet transactions and other things, as these would not show as NBFC exposures, according to Haria.
"It is also helpful to the banks – they get higher yields and they also get to understand how the portfolio of these NBFCs behaves. It’s also a kind of win-win, at least for now," he said.