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MUMBAI : Banks seem to have favoured non-bank lenders in extending loans over corporates in the first seven months of FY23, showed Reserve Bank of India (RBI) data.

In October, bank loans to non-banking financial companies (NBFCs) grew 38% from the year earlier to 12.6 trillion.

NBFCs, which faced a liquidity crunch after a debt repayment crisis at Infrastructure Leasing and Financial Services in late 2018, have made ample provisions for bad loans and have managed their risks better, besides diversifying their businesses, analysts said.

Non-bank lenders typically avail term loans for three to five years from banks to extend loans to customers, besides borrowing small amounts for working capital requirements, primarily for temporary cashflow mismatches.

Bankers said the surge in loan disbursal to NBFCs is due to the rising loan demand witnessed by non-bank lenders from their customers after two years of covid-19.

For the last couple of years, demand for NBFC loans has been stagnant due to the pandemic. However, rising economic activity led to a demand surge, said a private sector banker, seeking anonymity. That said, well-rated non-bank lenders with strong parentage are preferred over peers. “Having learnt our lessons from the IL&FS crisis, bankers are more thorough in their dealings with NBFCs."

While loans to micro, small, medium and large industries grew by 1.35 trillion between March and October, loans to NBFCs were up by 1.77 trillion, and retail loans grew by 3.89 trillion.

“Lending to NBFC has been a prime factor in pulling up credit growth of the banking sector. Banks have also extended the credit through the investment route," said Prakash Agarwal, director and head of financial institutions, India Ratings and Research.

High credit growth for the NBFCs was driven by a low base and strong growth of the non-banks, he said. While overall system interest rates have been rising, banks have been more competitive in NBFC loans, resulting in some shift in the share from the debt markets towards banks, Agarwal added.“We have also noticed that some offshore borrowings, which are falling due, are being refinanced domestically as the external market becomes less accommodative."

According to Crisil Ratings data, non-bank financiers are more reliant on bank loans than they were a few years ago. The share of bank loans in overall borrowings has increased from 27% in March 2018 to 36% in September. Consequently, the share of non-convertible debentures has declined from 42% in March 2018 to 34% in September.

Crisil projected healthy assets under management (AUM) growth for NBFCs, including housing finance companies. It expects AUM to grow 13-14% in FY24 and 12-13% in the current financial year. The rating agency said competition from banks would remain intense, and rising interest rates would exert pressure on margins and limit competitive ability, especially in segments like home loans and new vehicle financing. Home loans comprise 40-45% of non-bank lenders’ AUM, followed by vehicle finance at 20-25% and unsecured loans at 8-10%.

ABOUT THE AUTHOR

Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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