Bank lending to non-banking finance companies (NBFCs) has surged approximately 3.8 times in around five-and-a-half years, reaching Rs 14.8 lakh crore in October 2023, showcasing a 22.1% year-on-year growth. This significant expansion, representing a 279% increase since February 2018, highlights the robust progress of NBFCs in the post-pandemic period, as per a report by CareEdge Ratings.

In contrast, mutual funds (MFs) have prudently reduced their exposure to NBFCs by 31.4%, declining from Rs 2.31 lakh crore in 2018 to Rs 1.58 lakh crore by October 2023. Notably, the share of MF exposure to NBFCs as a percentage of debt assets under management (AUM) has decreased from nearly 20% in late 2018 to around 11%.

Conversely, the share of banks’ advances to NBFCs, as a percentage of aggregate advances, has doubled from approximately 4.5% in February 2018 to nearly 9.6% in October 2023. This shift in allocation indicates a changing risk perception and strategy in the financial landscape.

The credit extended by banks to NBFCs has consistently risen over the past five years, accelerating post-Covid-19 pandemic, and this growth trend has further intensified during FY23, extending into the first half of FY24.

After the merger of HDFC Limited with HDFC Bank, the quantum of outstanding exposure of banks to NBFCs experienced a sequential reduction, reaching pre-merger levels in October 2023, according to the report. The Reserve Bank of India (RBI) has prescribed an increase in risk weights for advances to AAA-A-rated NBFCs by 25%, impacting around 40-50% of the current outstanding.

Additionally, the proportion of NBFC exposure concerning aggregate credit has increased from 9.4% in October 2022 to 9.6% in October 2023, indicating continued confidence in this sector. Meanwhile, MF debt exposure to NBFCs, encompassing Commercial Papers (CPs) and corporate debt, saw a 21.9% increase to Rs 1.58 lakh crore in October 2023, despite a sequential decline of 10.5% from September 2023.

Highlighting their relative exposure sizes, MFs’ debt exposure to NBFCs remained at 10.7% as a percentage of “Banks’ advances to NBFCs” in October 2023, showcasing prudent portfolio management amid changing market dynamics.

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