Lack of credit appetite and availability of cheaper alternate sources of financing saw non-banking finance companies (NBFCs) rely less on bank financing in the past year.
However, this trend is likely to reverse with most rating agencies predicting improved economic growth over the next one year.
Year-on-year, bank loans to NBFCs saw a 4.4 per cent degrowth in September 2014 as against a robust growth of 26.6 per cent in September 2013.
As on September 19, 2014, bank loans to NBFCs stood at ₹2.93 lakh crore compared with ₹3.07 lakh crore on September 20, 2013.
This ₹13,400-crore drop in the one-year period represents a 4.4 per cent fall in bank credit to NBFCs.
Ramesh Iyer, CEO and Managing Director, Mahindra and Mahindra Financial Services, said, “The overall market is tight…so, may be, the offtake (of loans from banks by NBFCs) is less.”
Despite this, bank finance continues to be a major source of funding for NBFCs with some large NBFCs drawing as much as 80 per cent of their total fund requirements from them.
ProxyTherefore, bank funding can be used as a proxy to ascertain the performance of NBFCs, but only to an extent.
This is because, while bank loans to NBFCs have come down, NBFCs continue to get bank funds via securitisation.
Securitisation is a process where a bank buys out a part of an NBFCs loan portfolio to meet the former’s priority sector requirement of 40 per cent of total credit. This usually happens in the last quarter of any financial year.
Saswata Guha, Director - Financial Institutions, Fitch Ratings, says, “There has been movement from direct funding (loans) to indirect funding (securitisation).”
He added that banks have become risk-averse in the past 15-18 months because of rising NPAs in the NBFC sector.
Another reason for the dip in bank loans to NBFCs, as measured by the RBI’s sectoral deployment of credit, is because NBFCs are also tapping other sources of finance such as bonds.
Lakshmi Narsimhan, CFO, Magma, says, “It is actually a bit of both. The rates are quite favourable in the capital markets and therefore NBFCs are looking for finance from the capital markets. Banks are tied down by the base rate constraints (they cannot lend below this rate). If I want to get three-year finance, I can get it from the market at about 50 basis points cheaper than bank finance.”
But this trend is a temporary blip, according to Fitch Ratings’ Guha.
Bank lending to NBFCs will increase as soon as the economy picks up steam. With most rating agencies predicting GDP growth rate of between 5.5 and 6 per cent this financial year, Guha says, “It is reasonable to assume that bank funding to NBFCs will only increase.”