Mumbai: Last Wednesday, Reserve Bank of India (RBI) deputy governor S.S. Mundra advised banks to monitor their rising exposure to non-banking finance companies (NBFCs).
The advice is timely as a strange set up is in place which connects banks with the very NBFCs that are competing with them for market share. Bank credit to NBFCs grew at 15.2% to an outstanding of Rs.3.40 trillion as of August-end, data from the RBI shows. Over the last decade, the share of loans to NBFCs in banks’ non-food credit has risen to 5.18% now from a little over 2.5% in 2006.
For the banks, it is attractive to outsource their core function of lending by taking exposure to finance companies.
But is this the whole story?
Look closely at the data and it shows that bank lending to NBFCs has stagnated over the last two years. The share of loans to NBFCs in the total non-food credit that banks disbursed has remained around 5% since 2012. In fact, it has dipped on several occasions between 2012 and 2016.
This fits with the increasing bond market borrowing of the NBFCs. In any given year, NBFCs account for more than 60% of bond issuances. Total issuances have grown by a compounded annual growth rate (CAGR) of roughly 15% and so have bond issuances by NBFCs.
Large NBFCs like Power Finance Corp. Ltd, HDFC Ltd, LIC Housing Finance and Dewan Housing Finance are top-rated NBFCs that have the easiest and unfettered access to the bond market and even get the choicest pricing.
To be sure, they still depend on banks for nearly half of their funding requirements. And for some NBFCs, fundraising from the bond market forms only a sliver of the total pie, partly because access to the bond market is restricted given their credit ratings.
But these companies have long left the banking cradle for other resources to raise funds. True, they do not have access to cheap public deposits like banks do. But the bond market has given NBFCs an edge over cost of borrowing with yields that are more than 100 basis points lower than bank lending rates.
With the push from the regulator to deepen the bond market, NBFCs will only benefit more. This would add to their muscle as they compete with stalwart public sector banks for market share.
With public sector banks preoccupied on the asset quality front, it is a freeway for NBFCs to aggressively expand and grab a bigger share of the loan market. Indeed NBFCs are not just gobbling up market share but also entering into areas like working capital loans, traditionally the stronghold of banks.
According to RBI deputy governor Mundra, NBFCs saw their loan book expand by 37% between FY14 and FY16, which is twice the pace of the about 19% growth that banks reported. Un-bonding with bank borrowings will give NBFCs more mojo. These developments are reflected in the bullishness of the market on NBFCs and in their very high valuations.