Banks again turned to NBFC lending due to increased demand

Banks' outstanding loans to non-banking financial companies (NBFCs) have increased due to higher demand for credit, stabilizing asset quality trends and improving collection efficiency, bankers and industry experts said. According to Reserve Bank of India data, non-bank lending to non-banking financial companies grew by 30.6 percent year-on-year to Rs. 11.7 lakh crore has happened.

Overall credit growth in this system is almost double. Bank lending to non-banking financial companies compared to last year was Rs. 2.74 lakh crore has increased and from March 2022 to Rs. 93,000 crore has increased. A favorable base effect is where the comparative number for the base period, in this case September 2021, is abnormally low, leading to the percentage growth in the current period being relatively large. The impact of Covid is largely over, the economy is picking up and non-banking financial companies are seeing healthy collection trends. That is probably why banks have more confidence in lending to NBFCs. However, banks are still cautious about selecting their borrowers. The preference of most banks is still tilted towards AAA or AA+ rated non-banking financial companies as this sector is still not fully developed. Once there is more clarity and confidence. Then, disbursement of credit to low-rated non-banking financial companies will also begin, the banker added. Banks have in recent times aligned their exposure to better-rated or lower-risk non-banking financial companies. The asset quality of listed players is generally healthy. Underlying segments such as housing and vehicle sales are witnessing good growth while segments such as micro finance, personal loans and education loans are witnessing an increase in demand.

Commercial papers issued by non-banking financial companies maturing in three months are trading in the range of 7.25-7.45 percent, with a tight banking system liquidity surplus. Rates on non-convertible debentures for a three-year period are higher than 7.9 per cent for top-rated NBFCs. On the other hand, the 10-year benchmark government bond yield is 7.28 percent. The rate differential is huge and it is very expensive to borrow from the market even for top rated non-banking financial companies. So there is no option but to borrow from banks.