Large depository non-bank finance companies such as Bajaj Finance and Shriram Finance Ltd, for example, sharply raised their fixed deposit rates this month, hoping to shore up capital that can offset lower bank borrowing.
Non-bank lenders, who rely on banks for a significant portion of their loans, are now turning to other more expensive options for finance, including deposits and bonds. Deposits are expensive because NBFCs have to offer higher rates than banks.
The Reserve Bank of India in November increased the risk weights on NBFCs by 25 percentage points, making their cost of borrowing from banks more expensive by 30-50 basis points, which is one hundredth of a percentage point. Higher risk weights require banks to set aside more capital to provide cover against such loans.
The regulator has warned of the increasing exposure of banks to NBFCs as it found that loans to the non-banks are being channeled into unsecured loans through fintech platforms. RBI has decided to bring this down by restricting bank financing to the NBFCs.
“Liquidity in general has been tight in the system for the past several months. Further, banks have tightened their NBFC segment exposure limits as well as single NBFC exposure limits significantly in recent months following RBI action,” the AAA chief said. rated NBFC, declining to be identified.
“Furthermore, risk weights on lending to NBFCs, especially AAA, have been disproportionately raised recently. NBFCs of the scale and size of Bajaj and Shriram, therefore, do not have much choice but to turn to deposits to shore up liabilities for maintain their asset-growth expectations.”
NBFCs say their growth could slow as the cost of borrowing increases and banks are cautious about lending to them.
“We would like to grow steadily and keep margins stable. If you decide to grow steadily, NBFCs will have to pass on the rates (to customers) and growth rates may slow down,” said Umesh Revanar, executive vice-president of Shriram Finance. . “It depends on what NBFCs want to do. Instead of 20% you grow at 15%.”
Bajaj Finance could not be reached for comment.
While Shriram Finance, which is rated AA+, raised fixed deposit rates by 5-20 basis points on various maturities by up to 10.5%, Bajaj Finance, rated AAA, increased its FD rates for senior citizens by up to 60 basis points. in the 25-35 month tenure, and by 40 basis points in the 18-24 month tenure up to 8.85%.
For Bajaj Finance and other AAA rated companies, bank financing is available at the repo rate – 6.5% for fresh financing, or at MCLR of 9.30% for existing loans. MCLR, or the marginal cost of finance based lending rate, is the reference point below which banks are not allowed to lend.
The difference between AAA and AA+ loans is 25-40 basis points. The average bank loan rate to AAA should be 8.40-8.50%.
“I understand that the Reserve Bank of India has asked banks to be cautious about lending to NBFCs after they increased the risk weights. While bank credit has increased, incremental credit growth to NBFCs has slowed down,” said a senior private sector official. bank
Banks are among the largest lenders to NBFCs. For Bajaj Finance, bank loans accounted for 24% of its total borrowing, while deposits accounted for 29% and money markets 47%, as of December 2023.
For Shriram Finance, banks contributed 26% to its total funding, while public deposits stood at 22% and the rest was split between money markets, securitization and foreign currency bonds.
According to rating agency Icra, bank credit to the NBFC sector has declined in the previous 2-3 months. Recent RBI data shows that bank credit growth to NBFCs fell to 14.7% in February, from 31.9% a year earlier and 15.6% in January.
Total bank credit exposure to NBFCs stood at ₹15.14 trillion at the end of February.
“Moreover, banks would be more constrained to increase the share of their exposures to the NBFC sector, given their internal sectoral constraints and the recent increase in risk weights by the RBI for bank exposures to the NBFCs,” Icra said in its latest report on NBFCs.
“In addition, bank credit is expected to grow by 11.7-12.6% in FY2025, less than the robust 14.9-15.3% estimated for FY2024. Thus, assuming that the banks continue to hold the share of credit to the sector (as % of their total credit) at current levels around 9.4%, incremental direct lending by banks could be capped at Rs. 1.7-1.9 trillion by FY2025,” it added.
