Bank loans

Bank lending to NBFCs grows more slowly as credit to small lenders dries up

Outstanding credit to non-bank lenders has been growing in the low numbers for much of the current year, with banks’ NBFC book actually down 2.2% year-on-year in June 2021.

Growth in outstanding bank loans to non-bank financial corporations (NBFCs) has slowed significantly on an annual basis (year-on-year) in 2021, according to data released by the Reserve Bank of India (RBI). Industry executives said the phenomenon is the result of credit drying up to smaller NBFCs amid heightened caution from banks.

Outstanding credit to non-bank lenders has been growing in the low digits for much of the current year, with banks’ NBFC book actually declining 2.2% year-on-year in June 2021. Growth returned to positive territory in July, although it remained at a low 0.5%. This contrasts with growth rates of 20-36% seen each month during the comparable period of 2020, when the pandemic first broke out in India.

Industry executives at NBFC said liquidity is not an issue for big players, but smaller lenders are struggling to access bank loans. Ramesh Iyer, vice president and managing director of Mahindra & Mahindra Financial Services, told FE that it was necessary to look at the situation of small NBFCs to put things into perspective. “I heard that small NBFCs are not able to get money from banks. That could be one of the reasons (why credit growth is slower),” he said.

Bankers admit in private conversations that they exercise caution when lending to some NBFCs, especially those that have faced collection difficulties during the pandemic. “Last year banks were cautious due to Covid, but later we saw that NBFCs were able to manage well. The second wave has made things difficult again as collections have been hit hard,” said a senior public bank executive.

Banks and non-bank lenders reported deteriorating asset quality in the April-June quarter in loan categories where inflows predominate. Gold lending, commercial vehicle (CV) lending and microfinance saw increased slippages in the first quarter of FY22 as the second wave of Covid-19 hurt the collection effort. There was also no moratorium on repayments, unlike in 2020, which made stress more evident on lenders’ books.

In a recent presentation, analysts from India Ratings and Research said that a trend of consolidation and polarization is emerging in the NBFC segment, with AA+ and above NBFCs growing their assets under management (AUM) much faster than A+, A and A- rated non-banks. In terms of asset classes, real estate-focused NBFCs have seen their AUM stagnate due to a funding crunch and other sector-specific challenges. In the first quarter of FY22, retail NBFCs also experienced a decline in assets under management largely due to the second wave of Covid.

The rating agency also expects the funding environment for small microfinance institutions (MFIs) to remain challenging. “For most large MFIs (assets under management above Rs 5,000 crore or backed by a large sponsor), bank funding lines could continue and as a result they may not face immediate liquidity stress. That being said, small and medium MFIs are expected to conserve cash and hence their disbursements might be constrained which could lead to a lag in their performance,” India Ratings analysts said.

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