NBFCs lower exposure to bank loans, rely on commercial papers and bonds

MUMBAI: Non-banking finance companies have lowered their dependence on bank funds this year, data from the Reserve Bank shows, relying more on commercial paper and bonds for fundraising as lenders hold back on reducing their base rates.

Bank lending to NBFCs in October increased by 7% to Rs 3.1 lakh crore compared with a growth of 22.1% in the year-ago month, according to RBI data released earlier this month. Overall loans during the month increased by 11.1% from 17% in October last year.

Lenders attribute this trend to subdued demand, among other things. “Overall disbursement is lower than last year,” said Ramesh Iyer, MD and CEO of Mahindra Finance. “Even the festive season of November did not see credit pickup. There needs to be buoyancy in the economy for things to turn around.”

In contrast, demand for commercial paper has picked up. Overall borrowings through CP has risen by 63% so far this year. In the April-December period, firms raised Rs 1.27 lakh crore (net of redemptions) through this route compared with Rs 78,280 crore a year ago. According to data, outstanding or total CP stock in the market is about Rs 2.34 lakh crore. Top-rated firms have raised funds through commercial papers at 8.6%, about 150 bps lower than average bank base rates.

That NBFCs are seeing demand improve is also evident in a marginal sequential pick-up in bank loans. “There is liquidity in the banking system. Borrowing is likely to pick up in the coming days,” said Umesh Revankar, MD and CEO of Shriram Transport Finance. They expect the situation to improve after the January harvest, which could be from the second fortnight of February.

Bank borrowing is cheaper than borrowing from the market through non-convertible debentures. While banks lend at base rate to NBFCs, NCDs cost 25-50 bps over the base rate. In the last quarter, NBFCs raised funds through securitisation.