Revival in Bank Credit to NBFCs in February 2021

Introduction:

Bank credit to NBFCs has picked up for the first time during FY21 in February, indicating a positive impact of RBI’s liquidity measures and less risk aversion at banks. Recovery in lending by Banks to NBFCs is a good signal for both sectors. This process of lending loans by Banking to NBFCs is also called Shadow Banking.

Key Role of NBFCs in improving Credit Growth through Different Lending Models:

• Non-Banking Financial Companies are excel in searching new sectors to lend loans.
• Also, majorly the credit growth accounts for these operations taken by NBFCs.
• Ex. Gold Loan was popularized by Gold financing companies like Muthoot Finance, Manappuram Finance, etc.
• Such NBFCs have a wider reach and hence these companies play a crucial role in credit development.

Here is a 4 point analysis explaining how NBFC lending by Banks is gaining pace.

1) Recovery in Bank Credit to NBFC:

• Lending to NBFCs by Bank has reported a continuous decline from April 2020 to January 2021.
• Bank Credit to NBFCs was 30.3% in April 2020, which fell to 24.1%, 9.2%, and 6.6% in July 2020, October 2020, and January 2021 respectively.
• The consistent downfall in the credit by banks was because it became risk-averse due to uncertainties of Covid-19.
• But in the last two months, there is growth in credit by a bank to NBFCs.
• Bank Credit to NBFC has increased from 6.6% in January 2021 to 9.2% in February 2021 and 24.6% in March 2021.
• Bank Credit to NBFCs has been quite low for some time on account of the IL&FS Crisis that took place a few years back. But Current Stats shows the recovery of Bank Credit of NBFCs.
• There is a total of 64% in growth in Credit by Bank to NBFC from Rs. 5.5 Lakh Cr. September 2018 to Rs. 9 Lakh Cr. February 2021.

2) Key Drivers of Pick up in NBFC Lending:

i) Positive Impacts of RBI’s Liquidity Measure:

• Policy Rate Cuts by RBI has led to a reduction in the cost of funds.
• Also, RBI has Continued its Accommodative stance for supporting economic growth.
• Reduction in CRR from 4% to 3% has been done by RBI.
• Further, Central Bank will be Injecting Rs.1.37 Lakh Cr Additional Liquidity in the Banking system.
• Targeted Long-term Repo Operations (LTRO) for 3 yrs Tenure will be of Releasing Rs.1 Lakh Cr Liquidity.
• In the February MPC Meet, RBI announced the Inclusion of NBFCs under the LTRO scheme.
• On Feb 3-5, 2021 MPC Meet, RBI proposed to provide funds from Banks to NBFCs for incremental lending to the stressed/key sectors.
• Banking System Liquidity remained in large surplus in Feb-21 & Mar-21, with Average Daily Net Liquidity Absorption of Rs.5.9 Lakh Cr.
• Corporate Bond Issuances up 11.5% YoY from Rs.6.1 Lakh Cr as of 11M FY20 Apr-Feb to Rs.6.8 Lakh Cr. 11M FY21 Apr-Feb.

ii) All these measures provided great support for the Banking sector and it resulted in the Ease in Risk aversion of banks

3) Improving Exposure of Banks:

i) Strong Recovery in CPs & CDs in NBFC to Pre-COVID Level:

• Commercial Papers & Corporate Debt deployed together in NBFCs in Feb-21 stood at similar levels witnessed in Feb-20.
• Since banks are the major source of Financing needs of NBFCs.
• The Funds raised by NBFCs from Primary Market declined in Feb-21 as compared with Jan-2021 & Mar-2020.

ii) Recovery in Bank Credit to NBFCs Post IL&FS Crisis:

Growth of 64% has been reported in Credit by Bank to NBFC from Rs. 5.5 Lakh Cr. September 2018 to Rs. 9 Lakh Cr. February 2021

4) Fall in Debt Exposure of Mutual Fund to NBFCs:

Debt Mutual Funds have shown a high reluctance towards NBFCs post-IL & FS crisis.

i) Debt Exposure of Mutual Funds to NBFCs:

It has fallen from Rs. 1.78 Lakh Cr. in January 2021 to 1.62 Lakh Cr. in February 2021.

ii) Exposure of Mutual Funds into Commercial Papers of NBFCs: As a % of Debt AUM:

• In September 2018 i.e., during the IL&FS crisis, the Exposure of Mutual Funds into Commercial Papers of NBFCs was 9.5% of Debt AUM.
• The same has gone down to 4.3% of Debt AUM in February 2021 and 4% in March 2020.

iii) Outstanding Investments in Commercial Papers of NBFCs:

Outstanding Investments in Commercial Papers of NBFCs has gone down from Rs. 90,000 cr. in January 2021 to Rs. 70,000 Cr. in February 2021.

iv) Investment into Corporate Bonds of NBFCs

In September 2018 i.e., during the IL&FS crisis, Investment by Mutual Funds into NBFCs Corporate Bonds was Rs. 99,000 Crore, which has decreased to Rs. 94,000 Cr. in March 2020 and Rs. 90,000 Cr. in February 2021.

Conclusion:

Looking at the statistics, it seems that NBFCs are lacking the support of Institutional Investors but Banks have now again started lending to these NBFCs which is a positive sign.