Debt funds’ exposure to NBFCs falls 11.6% YoY to Rs 1.49 lakh cr in January: CareEdge report

Mutual funds debt exposure to NBFCs falls 11.6% on-year to Rs 1.49 lakh cr in January, says CareEdge

The exposure of mutual funds (MF) to Non-Banking Finance Companies (NBFC) debt instruments fell by 11.6 percent to Rs 1.49 lakh crore in January, while increasing sequentially by 4 percent from December 2022 levels, CareEdge said in a report.

The share of MFs has been on a consistent declining trend for the last several quarters. This is due to a mix of higher interest rates in the bonds markets led by higher long-term government securities rates and risk aversion in the debt capital markets restricting funding availability for NBFCs rated lower than the highest categories, the ratings agency said.

Further, given the relatively lower MFs’ exposure to NBFC debt, the impact of the removal of the indexation benefit for calculation of long-term capital investments in NBFCs is not likely to be material, CareEdge said.

According to the report, investment in corporate debt of NBFCs fell by 22.4 percent year-on-year to Rs 0.67 lakh crore in January 2023, The outstanding investments in commercial papers of NBFCs remained mostly flat (decline of 0.1 percent year-on-year) to Rs 0.81 lakh crore in January 2023.

On the other hand, bank outstanding credit to non-banking finance companies (NBFC) increased by 31 percent year-on-year in January to Rs 12.9 lakh crore, the report said.

The banks’ outstanding credit to NBFCs rose by nearly 1.5x since February 2020. The banks’ credit exposure to NBFCs had crossed four crucial thresholds in CY2022, i.e., Rs 10 lakh crore in January 2022, Rs 11 lakh crore in June 2022 and Rs 12 lakh crore in October 2022, according to the rating agency.

“Growth in bank credit to NBFCs witnessed a healthy trend in the later part of FY22, which continued its upward trajectory in FY23 reporting a growth of over 30 percent in the last five months,” the report said.

The rating agency in its report further said that this growth can be attributed to the base effect, better financial position and growing visibility of NBFCs and the fact that rates offered by banks continue to be favourable compared to the capital market yields.

Till January 2023, lending to NBFCs constituted 18.2 percent of incremental lending of aggregate credits.

CareEdge Ratings expects certain banks to face difficulties in extending further credit to the NBFC sector as they move closer to the sectoral exposure norms.