Reversal of Bank Credit Flow to NBFCs Observed for the 44th Consecutive Month
In a significant development, bank credit to non-banking financial companies (NBFCs) has recorded negative growth for the first time in 44 months, falling 0.3% year-on-year to Rs 15.63 lakh crore as of May 30, as per the latest data released by the Reserve Bank of India (RBI) on Monday.
The prolonged negative growth of bank credit to NBFCs can be attributed to several factors. Banks' cautious lending approach during periods of financial uncertainty or when NBFC credit quality is perceived as weaker has been a key contributing factor. This hesitance can prolong the negative credit growth for extended periods.
Another reason is the shift in funding sources for NBFCs. NBFCs increasingly rely on market borrowings such as bonds and commercial papers rather than bank loans. Because market instruments can respond more quickly to policy rate changes, NBFCs may prefer these over bank credit, leading to lower demand for bank loans.
Stricter RBI regulations, including enhanced capital adequacy norms and prudential standards under the Master Direction on NBFCs, have also played a role. These measures push NBFCs to strengthen their balance sheets and reduce dependence on bank credit, which could reduce bank credit growth to NBFCs during this period.
NBFCs improving their credit appraisal, risk management, and repayment support systems means they are better positioned to access diverse funding sources, reducing reliance on banks. Overall liquidity and credit market conditions, including stress post-2018 crisis events, may have also influenced banks' conservative credit allocation to NBFCs.
Meanwhile, the Reserve Bank of India has not released any new data in this paragraph. Among major industries, outstanding credit to engineering, construction, and rubber, plastic, and allied products showed an accelerated year-on-year (YoY) growth. On the other hand, bank loans to agriculture and allied activities grew at 7.5% YoY, a decrease from 21.6% in the corresponding fortnight of the previous year.
Elsewhere, IDBI Bank is expected to go private, with the government and Life Insurance Corporation (LIC) planning to invite financial bids by September to offload a 60.72% stake. The growth of personal loans has slowed down to 13.7% YoY, compared with 19.3% a year ago, due to a moderation in growth of other personal loans, vehicle loans, and credit card outstanding.
Overall credit to services moderated to 9.4% YoY compared to 20.7% in the same fortnight a year ago. No specific information about Karnataka Bank or the stock market was provided in this paragraph. The credit to public financial institutions declined by 8.6% YoY, and the credit to housing finance companies declined by 6.8% YoY. Since the reversal of risk weights in February, bank credit to NBFCs has decreased by over 3%.
- The cautious lending approach of banks during times of financial uncertainty or when NBFC credit quality is perceived as weaker has contributed to the prolonged negative growth of bank credit to NBFCs.
- NBFCs' preference for market instruments such as bonds and commercial papers over bank loans, due to their quick response to policy rate changes, has led to a decrease in demand for bank loans and may continue to influence bank credit growth to NBFCs.
- Stricter RBI regulations, including enhanced capital adequacy norms and prudential standards for NBFCs, have pushed these companies to strengthen their balance sheets and reduce their dependence on bank credit, thereby reducing bank credit growth to NBFCs.
