The growth of bank credit to non-banking financial companies (NBFCs) as of January 18, 2019 stood at 48.3% year-on-year (y-o-y), which aided the overall growth in deployment of gross bank credit to major sectors to 13.1% y-o-y. Growth of bank credit to NBFCs from April 2017 to January 2018 stood at 16.1% y-o-y.
On December 28, the Reserve Bank of India (RBI) had extended the facility of increase in single borrower limit for NBFCs and housing finance companies (HFC) to 15%, against 10% earlier, till March 31, 2019. “With effect from April 1, 2019, banks shall be guided by the instructions contained in December 1, 2016 circular, in terms of which banks’ exposures to a single NBFC shall be restricted to 15% of their eligible Tier-1 capital base,” said an RBI statement.
However, analysts at Edelweiss observed that the liquidity continues to remain tight and NBFC sentiments are weak, which could test the asset quality of retail and SME (small and medium enterprise) books. The credit flow to these sectors has slowed as banks have failed to offset the slowdown in NBFC lending, analysts added.
“Banking system is expected to be a little stressed on the liquidity front in March, and given that the deficit is still high in the system, there could be more OMO (open market operations) purchases by RBI in March,” said Sushant Hede, associate economist at Care Ratings.
As the liquidity situation has improved to some extent and the corporate bond market has also jumped in the issuance by NBFCs, there can be a mix of both (bond issues and bank credits) for more capital requirements going ahead, he observed.
“In January, monthly growth of corporate bond issuance by NBFCs was seen at around 30%, which can further increase in February and March,” said Hede.
The RBI had eased the norms on risk weighted exposure for NBFCs on February 22. Earlier, NBFCs had to be uniformly risk-weighted at 100%. Now, it has been decided that rated exposures of banks to all NBFCs, excluding core investment companies (CICs), would be risk-weighted as per ratings assigned by the accredited rating agencies, in a manner similar to that for corporates, said the RBI statement.
“Reduction in risk weightage could lead to marginal capital relief for banks as the risk weightage would come down, which we expect will positively impact less than 5-7% of overall NBFC exposure at the system level,” said analysts at Motilal Oswal. With reduction in risk weightage, marginal reduction in the cost of borrowing can be expected for NBFCs, they observed.