Battling liquidity crunch, NBFCs are turning towards banks for meeting their funding requirements.
According to a report by CARE Ratings, NBFCs' borrowing profile has changed significantly from capital market instruments to bank borrowings. Banks' lending to NBFCs registered a growth of 34.7 per cent from September 2018 to January 2020.
The exposure of mutual funds into the various debt instruments of the NBFC sector has declined since July 2018, when the crisis surfaced.
Exposure of mutual funds to non-banking financial company (NBFC) through commercial papers stood at Rs 70,000 crore in January 2020, a fall of almost 1.5 lakh crore from July 2018.
In line with the fall in invested amount via MFs, the percentage share also declined to 4.7 percent in Jan 2020 as against 12 percent in July 2018.
On the other hand, investments in corporate debt paper of NBFCs held steady at Rs 1 lakh crore in January 2020, and the percentage share declined to 6.2 percent compared with 6.5 percent in November 2019 and 7.7 percent in July 2018.
A slew of credit default cases, including at IL&FS and DHFL, has led to MFs suffering huge losses.
The report revealed that investments in CPs (Commercial papers) of NBFCs are on a consistent decline every month.
Due to the liquidity crisis, MFs withdrew 60 percent of their investments from this category.
Mutual funds attributed the fall in NBFC exposure to ongoing liquidity crisis in the space and also to the reduction in sectoral exposure limits by the Securities and Exchange Board of India (SEBI) in NBFC forcing MFs to pare their investments.
SEBI directed mutual funds to reduce exposure to NBFCs from 25 percent to 20 percent.
According to the Reserve Bank of India’s (RBI) Financial Stability Report (FSR) issued in December 2019, NBFCs were the largest net borrowers of funds from the financial system.
The liability profile of NBFCs has gradually changed as they have recorded a rise in the share of borrowings through banks.
As on September 30, 2019, out of total borrowings, 48.4 percent are from banks as compared with 42.3 percent in June 2018.
The share of borrowings through MFs declined from 33.0 percent in June 2018 to 25.9 percent in September 2019.
Currently, 42 mutual funds manage Rs 27.23 lakh crore of assets under management (AUM).