₹3.5 trillion to ₹13.5 trillion. This value does not include banks’ investment in NBFC securitisation transactions, non-convertible debentures (NCDs), commercial papers, co-lending arrangements, etc. Moreover, many banks reached their sectoral limits of lending to NBFCs.
The regulator viewed this trend as a systematic risk and increased the risk weight of unsecured lending by banks to NBFCs from 100% to 125%. The risk weight of lending to housing finance and priority sectors by NBFCs remained unchanged. Post this change, banks must keep extra money aside every time they lend to NBFCs.
Since banks now have less opportunity to lend to NBFCs, they have increased the interest rate on loans given to NBFCs to maintain a significant revenue stream. Some banks have also reduced their lending to the NBFCs. On the other hand, NBFCs face increased costs of growth capital and reduced liquidity.
As a result, the NBFC sector’s assets under management growth is expected to slow down to 14-17% in FY25, compared to the projected 16-18% for FY24, as per an estimate by Crisil Ratings. Over the last few years, other funding sources for NBFCs have also shrunk. For instance, after the Franklin Templeton crisis, mutual funds are not keen to underwrite credit risk and have deliberately reduced their credit exposure to NBFCs by more than 60%.
Other popular ways for NBFCs to raise capital were market-linked debentures (MLDs) subscribed by high-net-worth individuals (HNIs) and NCDs subscribed by foreign investors. Between January 2018 and 2023, as many as 150 issuers had cumulatively raised ₹83,000 crore through MLDs, with an increasing annual trend. The key reason was that until the union budget 2023, the returns on MLDs held for more than one. Read more on livemint.com