In October 2024, money from Mutual Funds (MFs) to Non-Banking Financial Companies (NBFCs) jumped by 47%. In contrast, banks only increased their lending to NBFCs by a small 6%. This rise shows that MFs stepped up to help NBFCs because banks are being more cautious due to new rules.
The total money MFs have lent to NBFCs is now around Rs 2.33 lakh crore, which is a 47.1% increase from last year. Although we don’t have details about the exact amounts for each type of loan, experts believe that NBFCs have been borrowing more through bonds than through commercial papers (CPs).
NBFCs have been more careful with their borrowing because they worry about keeping up their rapid growth in loans. Meanwhile, banks, which have traditionally been a big source of money for NBFCs, reported only a 6.4% increase in lending over the past year—the slowest growth in almost a year. Since November 2023, bank loans to NBFCs have been steady at around Rs 14-15 lakh crore. This slowdown is partly because the Reserve Bank of India has raised risk rules for banks when lending to NBFCs.
To find new sources of money, NBFCs are now looking beyond banks. They are exploring options like non-convertible debentures (NCDs), commercial papers, and foreign currency loans. According to Crisil ratings, the share of NCDs in NBFC borrowing grew by 0.30% in the April to June quarter, reaching 28.5%. Even NBFCs with lower ratings are trying to get into the market for NCDs.
Crisil notes that while banks will still be a major source of funds for NBFCs, the bond market is expected to gain popularity soon, especially as people predict a cut in repo rates.
Despite these changes, growth in assets for NBFCs is expected to slow down to about 15-17% over the next year. This is down from the 23% seen last year. This predicted slowdown, while still better than the average growth of 14% over the past ten years, is influenced by worries about household debt and the quality of loans. Strict rules from regulators focused on customer protection are also causing NBFCs to readjust their operations. The ability of each NBFC to tap into different funding sources will be crucial, especially given the slowdown in bank loans.
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