Mid-sized lenders take lead in funding NBFCs
Bigger banks aren’t willing to take risks and quote low spread on the loans offered
Small and mid-sized public sector lenders have turned bullish on the growth prospects of non-bank financiers and are undercutting larger peers to fund them.
The optimism stems from the fact that non-banking financial companies (NBFCs) are expecting a healthy loan growth, especially in their retail book, two bankers said on condition of anonymity. Smaller banks, the bankers said, can offer loans at rates that larger banks are not able to match, despite their lower cost of funds. The primary reason is that bigger banks are not willing to take risks and quote a lower spread on the loan. Besides, the Reserve Bank of India’s (RBI) increasing oversight on NBFCs is being seen as a positive for the industry, which is expected to strengthen governance practices.
One of the two bankers said there is a 50-100 basis points (bps) difference between what small and large banks are offering to NBFCs. In some instances, it is even greater, making nonbanks reach out to small lenders.
State Bank of India (SBI), Bank of Baroda (BoB) and Punjab National Bank (PNB) are among large state-owned lenders, while small and mid-sized banks are Central Bank of India, Indian Bank and Indian Overseas Bank, among others.
“Some AA-rated non-public sector NBFCs are raising oneyear funds at astonishingly low rates. The banks have turned very aggressive in this loan market,” the person cited above, an official of a large public sector bank, said.
While public sector NBFCs and those with strong parentage or AAA rating are usually able to negotiate better rates, the growing confidence in other nonbanks points towards an expected revival of the sector. NBFCs have been plagued by liquidity issues since a series of defaults by Infrastructure Leasing and Financial Services (IL&FS) in September 2018. Their troubles were accentuated by covid-19 with borrowers availing of RBI relaxations on repayments, while NBFCs were left out from the relief measures.
“Our bank sees value in the NBFC sector at present and we do not mind a lower spread, given the growth prospects of the industry. But I would like to highlight that smaller banks do not have the wherewithal of their larger counterparts and can only lower rates to a certain extent,” said the second banker, adding that the optimism is more towards retail-focussed non-bank lenders.
As on January 29, banks have disbursed ₹8.85 lakh crore to NBFCs, up 6.6% year -on-year. Despite the post-covid recovery, the growth rate is substantially lower than the 35.8% witnessed between January 2019 and 2020.
“Our discussions with industry experts point to a surge in credit demand across sectors and geographies. New housing loans (especially in the affordable category), used vehicle loans and MSME loans are seeing significant momentum,” said Emkay Research in a note on 19 February.