Non banking finance companies find raising money directly from the market cheaper

MUMBAI: With banks holding on to their lending rates even as market rates have fallen sharply, non-banking finance companies or NBFCs such as Shriram Transport Finance and LIC Housing Finance, their biggest customers, have turned their backs on the banking system and resorted to borrowing more by selling commercial paper and short-term bonds.

For the first time in more than four years, bank lending to NBFCs turned negative at the end of September, falling 4.4 per cent compared to the year-ago period to Rs 2.93 lakh crore, according to the latest Reserve Bank of India data.

In 2013, bank lending had risen 26 per cent in the corresponding period over the previous year. Bank loans have traditionally been a major source of funding for NBFCs. However, with the base rate, the benchmark over which banks lend to NBFCs has remained high as RBI has not signalled lower rates due to persistent concerns over high inflation. NBFCs have, therefore, found it cheaper to raise funds directly from the market. Indian firms, including NBFCs, raised almost Rs 1 lakh crore between September 15 and October 15 through commercial paper, according to RBI data. Some firms raised money at as low as 8.4 per cent interest rate.

Banks charge 25 basis points above base rate to NBFCs, adding up to 10.25-10.5 per cent. Public debt issuances charge 9.5 per cent on two-year NCDs and 10.5 per cent for three years, according to a senior NBFC official. "This time we had a large public issue of Rs 2,000 crore while we had permission to borrow Rs 3,000 crore, so we did not require funding from other sources," said Umesh Revankar, managing director and CEO of Shriram Transport Finance. "Companies which are comfortable borrowing short term, use commercial paper as it is cheaper."

A section of NBFCs is not seeing much demand for loans as the economic revival is still not perceptible, with the result that their requirement of funds has also reduced. "Overall lending has come down," said Ramesh Iyer, MD and CEO of Mahindra Finance. "The fall in percentage will relate to the companies borrowing from banks…whether companies like PFC and IDFC are going to the banks," he said.

The banks which used to lend to NBFCs to on-lend to firms are increasingly tying up with firms directly for various financing arrangements.