MFs raise tolerance for non-bank loans

What was the exposure of mutual funds to loans issued by Non-Banking Financial Companies (NBFCs)? ₹1.9 trillion in July, up ₹1.5 trillion in June, data from the Securities and Exchange Board of India (SEBI) showed.

According to SEBI data compiled by India Ratings and Research, investments in NBFC non-convertible debentures (NCDs) and commercial papers (CPs) have increased, but are still below 2018 levels. The collapse of IL&FS in September 2018 triggered a liquidity crisis, in which mutual funds withdrew a part of their investments from NBFCs. MF exposure to NBFC loans was gradually reducing since the IL&FS crisis and has now returned to November 2019 levels.

“About 20% of the exposure of mutual funds was in NBFCs through NCDs and CPs in June 2018, which subsequently fell to 10% despite increasing assets under management. Now, mutual fund investments are moving back and showing confidence and early signs of stabilization,” said Jinay Gala, associate director, India Ratings and Research.

Still, mutual funds are mostly buying papers from AA+ and above lenders, which are capable of delivering growth, Gala said. Non-banks rated A and below are still finding it difficult to raise funds.

“That said, the funding requirements for NBFCs have come down. For disbursements in Q3 and Q4, none of the NBFCs had to source large amounts of funds, as they were receiving repayment and using it for lending. The assets under management (AUM) were not growing that much anyway and hence, the need for funds was muted,” Gala said.

After debentures, banks are the second largest source of funding for NBFCs. However, bank credit to NBFCs remains sluggish as NBFCs do not reduce their sanctioned limits as they themselves have fewer borrowers. As a result, bank credit to NBFCs increased by 0.5%. ₹8.9 trillion at the end of July a year ago. In fact, between March and July, bank credit to NBFCs declined by 5.6 per cent, data from the Reserve Bank of India showed.

Experts said banks regularly follow up with large non-banks to know when they plan to use the sanctioned credit limit. However, NBFCs are going slow as disbursements have just started in July and August.

“NBFCs saw their AUM contracting around 1.5% during Q1 FY22. While collections were affected due to the second wave of Covid infections, a sharp drop in incremental disbursements and liquidity maintained by NBFCs supported them,” said AM Karthik, vice-president and sector head, ICRA.

Similarly, bank exposure to this sector declined from three months to June, said Karthik. He said that since disbursements are expected to rise from the low of Q1 of FY22, NBFCs may fall below their sanctioned credit limit and take incremental loans from banks.

Amid the COVID-19 pandemic, the RBI and the government announced a set of policy measures to tide over the situation, one of which was the TLTRO (Targeted Long-Term Repo Operations) scheme, aimed at providing liquidity to sectors and entities that have Were facing liquidity crunch. . Under the scheme, banks were provided funds at the repo rate and were directed to invest in investment-grade paper of corporates, including NBFCs.

Under TLTRO 1.0 announced on 27 March 2020, RBI conducted four auctions in phases of ₹25,000 crore each. TLTRO 2.0 was announced on 17th April 2020, seeking to address the liquidity crunch faced by small and medium-sized corporates including NBFCs and microfinance institutions. sum of ₹50,000 crore was to be made available at the repo rate for a period of up to three years.