Banks are now the preferred provider of funding to NBFCs, as they were more than two years ago. Borrowing is shifting to the banking system amid a sharp pullout of funds from debt mutual funds and rising funding costs in capital market, experts said.

Small NBFCs could face crowding out in FY23, given the hardening of rates in the capital market,” said Pankaj Naik, director at credit rating agency India Ratings. “A large quantum of borrowings to be raised by large NBFCs would lead to a further increase in the banks’ exposure to the sector, and small NBFCs thus could face crowding out.

According to data from CARE Ratings, NBFCs have increased their lending to banks by Rs 1.87 lakh crore in 12 months, while mutual fund debt exposure dropped 3.4 percent to Rs 1.5 lakh crore. Banks’ outstanding credit to NBFCs has been rising as compared to last year due to a low-base effect, pickup in economic activities, and shifting of borrowing by NBFCs to the banking system due to rising yields in the capital market.”

NBFCs have been steadily reducing their exposure to non-banks post the collapse of IL&FS in August 2018. While nonbanks faced a turbulent liquidity crisis in the subsequent months, bank credit to NBFCs has continued its upward trajectory, reporting a growth of 17% in April 2022 and 20% in May 2022

According to the market research companies the share of NBFCs to total corporate debt dropped on year to 4.4% in May 2022 from 5.4% in May 2021. Meanwhile, investments in corporate debt by NBFCs dropped by 18.1% on year to `74,000 crore in May 2022. The percentage share of NBFCs to total corporate debt too declined to 4.4% in May 2022 from 5.4% in May 2021