MUMBAI: The banking sector is expected to witness rise in co-lending deals between Non-Banking Financial Companies (NBFCs) and banks after the Reserve Bank of India (RBI) Governor Shaktikanta Das asked shadow banks to reduce their over-dependence on bank funding. Smaller and mid-size NBFCs will prefer co-lending as funds sourced through banks will be cheaper than raising funds from bond market.
“Under co-lending, sourcing of loans is done by NBFCs while the underwriting is done by banks. So the funds raised under this arrangement will not be considered NBFCs’ exposure to banks,” Umesh Revankar, Executive Vice Chairman, Shriram Finance and Chairman of Finance Industry Development Council (FIDC)- a representative body of NBFCs, told FE. “For smaller NBFCs who do not have large balance sheet to raise funds via bonds, it is the best solution to diversify their source of funding,” he added.
Raising concerns about the growing interconnectedness between the banks and NBFCs, the RBI Governor last week asked NBFCs to focus on broad basing their source of funds.
“Though the banks are well capitalised, they must constantly evaluate their exposure to NBFCs and the exposure of individual NBFCs to multiple banks. The NBFCs on their part should focus on broad basing their funding sources and reducing over-dependence on bank funding,” said the governor said addressing the FIBAC 2023 Conference on Wednesday.
The share of borrowing by NBFCs from banks has been growing consistently over the past few years. Over the last five fiscals, bank loans to NBFCs logged a compound annual growth rate of 18% and stood at Rs 12.3 trillion as of September 2023, against Rs 5.5 trillion as of September 2018, according to a report released by ratings agency Crisil.
Turning to co-lending will also provide cost advantage to NBFCs as raising funds from bond market is costlier. “The bond market is always 25-50 basis points costlier than the bank lending. NBFCs looking for cheaper funds will opt for co-lending,” said a head of treasury operations of a public sector bank.
He added that the banking regulator is also comfortable with co-lending because the credit underwriting is done by the bank.
Experts say that it is easy for big NBFCs to tap debt market but NBFCs find it very difficult for smaller NBFCs to raise funds via bonds.
“NBFCs are faced with limited options to diversify their sources of capital. Corporate debt market continues to remain skewed in favour of top-rated issuers, while external commercial borrowings may not be a viable option at this stage of the global interest rate cycle,” Debopam Chaudhuri, Chief Economist of Piramal Group.
Another option to diversify funding of NBFCs is allow more such companies to except deposits. “Extending deposit-taking licenses, to large NBFCs with proven track record, is also a viable option. This will allow them to raise cheap funds through time deposits from the public, who in turn can get exposed to high yielding saving instruments,” he added.
Source: The Financial Express
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