Last year, RBI cracked the whip on a credit binge. The results are in

On 16 November, RBI raised risk weights on bank loans to NBFCs, as well as all unsecured consumer loans, by 25 percentage points. (Photo: Mint)
On 16 November, RBI raised risk weights on bank loans to NBFCs, as well as all unsecured consumer loans, by 25 percentage points. (Photo: Mint)

Summary

  • Bank credit growth to non-bank financial companies (NBFCs) fell to 14.7% in February, against 31.9% a year earlier and 15.6% in January, latest Reserve Bank of India data showed.

Mumbai: After repeated warnings about a risky credit binge, the central bank cracked the whip in November. Now, the results are showing.

Bank credit growth to non-bank financial companies (NBFCs) fell to 14.7% in February, against 31.9% a year earlier and 15.6% in January, latest Reserve Bank of India data showed. Total bank credit exposure to NBFCs stood at 15.14 trillion at the end of February.

During the six-month period between August and January, bank loans to NBFCs grew at an average of around 21%, a CareEdge Ratings report said on Thursday, against 28-30% in the 12 months earlier. Costlier bank loans also prompted many NBFCs to turn to the bond market. After the merger of HDFC Ltd with HDFC Bank, banks’ outstanding exposure to NBFCs also reduced sequentially, it said.

“We expect fundraising from the banking sector will moderate, while that from bond markets should increase back to earlier levels. NBFCs may utilize the extra cushion on asset-liability management (ALM) currently available, but this should not lead to a negative stance on ALM.

We expect credit growth rate from NBFCs to moderate slightly by about a couple of percentage points from current levels of around 20%, mainly due to the elevated base effect," said Sanjay Agarwal, senior director, CareEdge Ratings.

On 16 November, RBI raised risk weights on bank loans to NBFCs, as well as all unsecured consumer loans, by 25 percentage points. Categories like housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery were excluded.

According to rating agency ICRA, higher risk weights may affect incremental funding to NBFCs and raise their cost of funds, as banks set aside more capital to extend such loans. The tight funding environment may lead to a 1-3% moderation in NBFCs’ loan growth from the base projection of 13-15%, the rating agency said.

“Downside risks for NBFC AUM (assets under management) growth for FY2025 increased over the recent past, with a series of regulatory tightening across the financial sector space. While the increase in risk weights for bank credit to the NBFCs and on unsecured credit by the NBFCs is a dampener, tighter liquidity, entity-specific restrictions and guidance to the banking sector to keep control on credit-deposit (CD) ratio, can affect credit flow to the NBFC sector," ICRA said in its latest report on NBFCs.

Bank credit to NBFCs had seen significant growth over the last years. Direct bank lending makes up nearly 45% of the total NBFC borrowing book.

With bank credit growth itself expected to slow down to around 12% in FY25, against the 14-15% estimated for FY24, incremental direct bank lending to NBFCs may take a hit.

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