NBFCs face pricier loans as banks tighten credit

6 Jun 2024 , 01:48 PM

As banks restrict funding to the NBFC market, the cost of funds for non-banks may increase by 200 to 300 basis points. According to recent data, bank funds to the non-bank market decreased from 22% in the same period last year to 15% in April.

As non-banks get access to more costly sources of funding, their profit margins may also come under pressure. Over half of the total amount borrowed by non-banks is funded by banks.

The RBI’s rise in weighted assets on bank loans to non-banking financial companies (NBFCs) resulted in a substantial decline in bank loans to these entities, according to Macquarie Capital’s head of financial services research Suresh Ganapathy who talked to ET.

Almost half of the credit extended by NBFCs is financed by banks through direct loans and bond purchases. Thus, a reduction in bank funding does affect the growth and margin prospects of NBFCs.”

The banking regulator ordered banks and non-banks to set aside additional capital in November of last year as weights for loans made to non-bank finance companies (NBFCs), credit cards, and unsecured personal loans. This action was taken to control the excessive increase of these loans.

As non-banks gain traction with market borrowing, the cost of funds is also increasing. In April 2024, after 55 months, mutual fund debt exposure to NBFCs—including corporate debt and commercial papers (CPs)—crossed the ₹2 Lakh Crore threshold, according to a research by CARE Ratings. August 2019 was the last time the exposure exceeded ₹2 Lakh Crore.

The amount of debt that mutual funds owed non-banking institutions increased by 29.8% year over year and by 9.7% month over month, with CPs continuing to be more than ₹1 Lakh Crore for five months running.

The outstanding CP amount was ₹1.18 Lakh Crore as of May 2019, which is almost five years ago.

Bank lending is still cooling off in the meantime. According to data, mutual fund debt exposure to NBFCs increased to 13.4% as a percentage of banks’ advances to NBFCs in April 2024 from 11.9% in April 2023 and sequentially from 12.2% in March 2024. Meanwhile, the proportion of NBFC exposure in relation to aggregate bank credit decreased from 9.7% in April 2023 to 9.4% in April 2024.

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