According to a report, most non-bankers have reached the maximum funding cap from banks, which may impact their projected 16 per cent loan growth, leading to margin compression for the sector this fiscal.
The report stated that bank funding to NBFCs has grown rapidly to Rs 13.1 lakh crore in February 2023 from a low Rs 3.9 lakh crore in FY17, growing at a CAGR of 22 per cent, which is double the overall bank credit growth.
The rising share of bank funding has helped NBFCs offset the sluggishness in capital markets, which remained lukewarm during the pandemic and pricey during the first nine months of FY23.
The agency stated that non-banks, including housing financiers, will face increased funding challenges in FY24, which is likely to impact their loan growth target that was earlier projected to clip at 16 per cent.
The agency also mentioned that the only silver lining is the exit of the largest NBFC, HDFC, with its soon-to-be-completed merger with HDFC Bank as its exposure will move out from the classification under NBFCs.
Banks’ exposure to HDFC is a whopping Rs 1.5 lakh crore, which is around 11.4 per cent of the banking sector’s total exposure to non-banks. The overall exposure of banks to NBFCs was a high 41 per cent as of September 2022, according to the RBI’s financial stability report.
Another reason for the likely loan growth trouble is the rising interest rates, which have gone up by 250 bps since May 2022. Funding is likely to become more expensive and restricted as lenders realign their pricing and funds allocation.
Banks and capital markets together accounted for as much as 73 per cent of the funding sources for NBFCs in the first nine months of FY23.
Many banks, mostly public sector ones, are approaching their internal exposure limits. While banks may revisit their exposure limits in FY24, NBFCs’ loan growth and high sectoral concentration are likely to weigh on their minds.
The agency believes that NBFCs are likely to push their resource replenishment through securitisation/ direct assignment, raising deposits, and co-lending to manage pricing pressure. But, this will not be adequate to fully compensate for the shortfall in bank funding.
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