Exposure of banks’ mutual funds to NBFCs increased in August: CARE Ratings

CHENNAI: The credit and debt exposure of banks and mutual funds to non-banking finance companies (NBFC) went up in August 2023, said CARE Ratings in a report.

According to CARE Ratings, the credit exposure of banks to NBFCs stood at Rs. 13.8 lakh crore in August 2023, indicating a 25.8 per cent year-on-year (y-o-y) growth.

This expansion is indicative of the robust progress observed in NBFCs during the post-pandemic period.

Furthermore, the proportion of NBFC exposure in relation to aggregate credit has risen from 8.8 per cent in August 2022 to 9.3 per cent in August 2023.

On a month-on-month (m-o-m) basis, the amount rose by 0.6 per cent, the report said. Meanwhile, the mutual fund’s debt exposure to NBFCs, including Commercial Papers (CPs) and Corporate Debt, witnessed an increase of 35.8 per cent to Rs.1.77 lakh crore in August 2023 with CPs remaining above the one lakh crore threshold last seen in August 2019.

The credit rating agency said the trend is likely to continue based on the discussions with market participants. Large NBFCs focused on the capital market, while mid-sized and smaller NBFCs continued their reliance on the banking system as their primary source of funding.

However, given the general credit risk aversion of mutual funds, the exposure to NBFCs, particularly those rated below the highest levels, is not expected to witness significant growth.

Consequently, the aggregate dependence of mid-sized NBFCs on the banking sector for funding is likely to remain high while larger NBFCs will continue to move towards the capital markets, CARE Ratings said.