Bank loans to NBFCs grow slower as credit to small lenders dries up

The growth in outstanding bank loans to non-banking financial companies (NBFCs) has slowed down significantly on a year-on-year (y-o-y) basis in 2021, according to data released by the Reserve Bank of India (RBI). Industry executives said that the phenomenon is a result of credit to smaller NBFCs drying up amid heightened caution on the part of banks.

Credit outstanding to non-bank lenders has been growing in the low single digits through much of the current year, with banks’ NBFC book actually shrinking 2.2% y-o-y in June 2021. The growth rate moved back into positive territory in July, though it remained at a muted 0.5%. This is in contrast to the 20-36% growth rates seen every month during the comparable period of 2020, when the pandemic first broke out in India.

NBFC industry executives said that liquidity is not a problem for the larger players, but smaller lenders have been finding it difficult to access bank loans. Ramesh Iyer, vice-chairman and managing director, Mahindra & Mahindra Financial Services, told FE that there is a need to look at the situation of smaller NBFCs to put things in perspective. “I’ve been hearing that small NBFCs are not able to get money from banks. That could be one reason (why credit growth is slower),” he said.

Bankers admit in private conversations that they are being cautious while lending to some NBFCs, especially those who have faced difficulties with respect to collections during the pandemic. “Last year banks were being cautious because of Covid, but later we saw that NBFCs were able to manage well. The second wave has again made things difficult because collections were affected badly,” said a senior executive with a public-sector bank.

Both banks and non-bank lenders reported a deterioration in asset quality during the April-June quarter in loan categories where cash collections predominate. Gold loans, commercial vehicle (CV) loans and microfinance saw slippages rise in Q1FY22 as the second wave of Covid-19 hurt the collection effort. There was also no moratorium on repayments, unlike in 2020, which made the stress more evident on lenders’ books.

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

The rating agency also expects the funding environment for smaller microfinance institutions (MFIs) to remain challenging. “For most large MFIs (assets under management above Rs 5,000 crore or large sponsor backed), bank funding lines could continue and hence they may not face immediate liquidity stress. That being said, small and mid-size MFIs would need to conserve liquidity and hence their disbursements could be constrained, this could lead to lag in their performance,” India Ratings analysts said.