Banks, mutual funds’ credit exposure to NBFCs rises 26%

Credit Line

♦ MFs’ debt exposure including CPs and corporate debt rose 35.8% to Rs1.77 lakh cr

♦ Commercial papers remaining above Rs1 lakh cr

♦ Mid-sized NBFCs depend on banking sector for funding

Chennai: The credit and debt exposure of banks and mutual funds (MFs) to non-banking finance companies (NBFC) went up in August 2023, according to a report by CARE Ratings. The credit exposure of banks to NBFCs stood at Rs13.8 lakh crore in August 2023, indicating a 25.8 per cent year-on-year (y-o-y) growth.

This expansion is indicative of the robust progress observed in NBFCs during the post-pandemic period. Furthermore, the proportion of NBFC exposure in relation to aggregate credit has risen from 8.8 per cent in August 2022 to 9.3 per cent in August 2023.

On a month-on-month (m-o-m) basis, the amount rose by 0.6 per cent, the report said. Meanwhile, the mutual fund’s debt exposure to NBFCs, including Commercial Papers (CPs) and Corporate Debt, witnessed an increase of 35.8 per cent to Rs.1.77 lakh crore in August 2023 with CPs remaining above the one lakh crore threshold last seen in August 2019.

The credit rating agency said the trend is likely to continue based on the discussions with market participants. Large NBFCs focused on the capital market, while mid-sized and smaller NBFCs continued their reliance on the banking system as their primary source of funding.

However, given the general credit risk aversion of mutual funds, the exposure to NBFCs, particularly those rated below the highest levels, is not expected to witness significant growth.

Consequently, the aggregate dependence of mid-sized NBFCs on the banking sector for funding is likely to remain high while larger NBFCs will continue to move towards the capital markets, CARE Ratings said.

Last week, several banks helped kick off the reporting season with better reports than feared. Treasury yields have jumped after tumbling last week on worries that fighting in Gaza will escalate. Early Tuesday, the yield on the 10-year Treasury was 4.75 per cent, up from 4.71 per cent on Monday and from 4.62 per cent late Friday. Financial markets have a history of weakening initially after a geopolitical shock, such as a war, only to reassert themselves and eventually move with corporate profits, economic growth and other long-term fundamentals, according to Mark Hackett, chief of investment research at Nationwide.

“Investors should remember that markets are very resilient, have endured countless wars, recessions, and depressions, and have rewarded long-term investors with a well-crafted financial plan,” he said. More than 50 companies in the S&P 500 will report their earnings for the summer this week, including Bank of America, Johnson & Johnson and Tesla, and investors are hoping for a better reporting season for corporate profits.