Banks open loan taps to top performers among smaller NBFCs

Bank lending to NBFCs rose 31% in September 2022. Rating agency India Ratings has said that with the sharp rise in banks’ lending rates and stable rates in the capital market, large NBFCs could partially move to tap incremental funding through the capital market leaving bank funding open for small and mid-sized non-banks.

“While mid- & small-size NBFCs are majorly dependent on banks, banks also have selectively gained confidence in these NBFCs based on their performance during the pandemic and support shown by sponsors,” India Ratings said. “The agency expects the evolving funding ecosystem between banks and mid- & small-sized NBFCs is credit supportive.”

Bank financing is the primary and dominant option for stable funding for mid-sized NBFCs. The increase in bank funding to non-banks is also because these entities have demonstrated a reasonably satisfactory performance during the Covid-19 period.

“This has been augmented by the regulatory endeavour of reducing the regulatory gap between banks and NBFCs,” the agency said.

The regulatory framework for large NBFCs has become increasingly aligned with that of banks with the introduction of the Prompt Corrective Action framework and the revision of non-performing asset recognition norms.

The rating agency also believes that, with the improving funding access, there will be stiff competition among mid- and small-sized NBFCs for lending to SMEs through the secured and unsecured routes. India Ratings also said that there could be some pressure on net interest margins due to an 80 to 100 basis point rise in funding costs in FY23.