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Business News/ Market / Mark-to-market/  Why banks are outsourcing lending to NBFCs
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Why banks are outsourcing lending to NBFCs

A spate of bank frauds has unnerved bankers. Far better to lend to an NBFC with a decent credit rating than to take direct exposure to loans that could go bad

NBFCs accounted for almost a quarter of the rise in bank credit outstanding in the last six months. Photo: BloombergPremium
NBFCs accounted for almost a quarter of the rise in bank credit outstanding in the last six months. Photo: Bloomberg

Over the four-month period 23 December 2017 to 27 April 2018, the rise in total non-food credit outstanding at banks was 3.41 trillion. (Non-food credit is credit other than that advanced to the Food Corporation of India for their procurement operations). Of that amount, as much as 84,200 crore, or almost a quarter of the increase in bank non-food credit during these four months, was on account of loans to non-banking financial companies (NBFCs).

Simply put, instead of lending directly to firms or individuals, banks are outsourcing a large part of their job—a quarter of the job, to be precise—to NBFCs.

Consider the amount lent to NBFCs in perspective. During this four-month period, the housing sector (including priority sector housing) accounted for 14.5% of the total increase in non-food credit. Loans to industry accounted for 5% of this increase. Loans to agriculture were 8.4% of the increase in non-food credit. Compare that with loans to NBFCs accounting for 24.7% of the increase over the period.

This chart has the details.

Incremental loans to NBFCs accounted for around 14% of the increase in non-food credit for the year to 27 April 2018. So, the surge in advances to NBFCs has occurred in the last six months.

What has changed in the last few months in the credit markets? Market rates of interest have gone up. That means companies, including finance companies, who used to borrow from the commercial paper market have turned to banks for their funding. In fact, the amount of commercial paper outstanding as of 15 May 2018 was less than what it was on 15 October last year. So, demand for bank credit has gone up and that includes demand from NBFCs.

The other thing that has happened is a spate of bank scams and investigations, which has unnerved bankers. Far better to lend to an NBFC with a decent credit rating, reason bankers, than to take direct exposure to loans that could go bad. In any case, lending a lump sum to an NBFC is a faster way of meeting targets than lending to many dispersed borrowers.

The jump in loans to NBFCs is probably a mix of all these considerations, with the rising yield on commercial paper the main reason. But bankers caution that, if the economic recovery is not to be derailed, the enthusiasm for investigations should not become a witch-hunt.

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Published: 05 Jun 2018, 09:59 AM IST
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