Bank credit to NBFCs shrinks

Credit to NBFCs dropped 4.4% in Sept this year compared to an increase of 26.6% in the corresponding month last year

Non-banking financial companies’ (NBFCs) credit offtake from banks has declined substantially in September according to data from the Reserve Bank of India (RBI).

Credit to NBFCs dropped 4.4 per cent in September this year compared to an increase of 26.6 per cent in the corresponding month last year.

Vibha Batra, senior vice-president and co-head of financial sector rating at ICRA, said the shrinkage of credit to NBFCs is driven partly by the slowdown in the business of retail finance companies. If the overall funding requirement is low, then the demand for bank credit (from finance companies) will be less as well.

Bank credit to NBFCs during the 12 months ended September 2013 had grown substantially. The finance companies opted to tap for money since coupon rates on money market instruments shot up during July-September 2013 as RBI took steps to curb liquidity in the system. The banking regulator had clamped on market liquidity to check volatility in the rupee.

Now, the interest rates on debentures and short-term paper have eased substantially even below the base rate of banks. Many top-rated finance companies have sought to raise money from the market rather than approaching banks for funds.

The overall credit demand continued to remain tepid in September despite the festival season, which began in August.

Banks’ non-food credit growth increased by 8.6 per cent in September 2014 compared with the increase of 18.2 per cent in the same period last year. The growth in September was even lower than the expansion registered in August this year at 10.2 per cent.

In the same month, credit to industry increased by only 6 per cent against a 17.6 per cent increase in September 2013. “Deceleration in credit growth to industry was observed in major sub-sectors, barring construction, glass and glassware, beverages and tobacco and mining and quarrying,” RBI said in a notification.

Credit to the services sector also increased at a slower pace of 5.3 per cent, compared with the increase of 22.1 per cent in September 2013. The only exception was credit growth in the agriculture sector, which rose 18.8 per cent in September 2014, up from 13.2 per cent in September 2013.