{"id":34979,"date":"2018-10-31T14:39:48","date_gmt":"2018-10-31T09:09:48","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=34979"},"modified":"2018-10-31T14:39:48","modified_gmt":"2018-10-31T09:09:48","slug":"whos-lending-to-indian-businesses","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/whos-lending-to-indian-businesses\/","title":{"rendered":"Who\u2019s lending to Indian businesses?:"},"content":{"rendered":"<p><a href=\"http:\/\/www.thehindu.com\/todays-paper\/tp-business\/whos-lending-to-indian-businesses\/article19749502.ece\"><span style=\"font-weight: 400;\">Who\u2019s lending to Indian businesses?<\/span><\/a><span style=\"font-weight: 400;\">:<\/span><\/p>\n<p><b>Brief overview<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Banks share in the new credit have fell in FY1. Corporate bond issuances have rose 56% and NBFCs have lent more. <\/span><\/p>\n<p><b>Abou RBI\u2019s annual report <\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The banks are busy chipping away at their mountain of bad loans and operating on precarious levels of capital.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Reserve Bank of India\u2019s recently released annual report for 2016-17 that shows that many new sources of finance are springing up. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Domestic businesses are increasingly turning to the bond markets, Non-Banking Finance Companies (NBFCs) and foreign direct investors to meet their funding needs.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">RBI\u2019s compilation on the \u2018Flow of financial resources to the commercial sector\u2019 shows that FY17 marked a watershed year for Indian banks\u2019 share in commercial credit.<\/span><\/li>\n<\/ul>\n<p><b>Other impacts <\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In the four years ending FY17, domestic businesses have soaked up between 12 lakh crore and 15 lakh crore, per year in credit funding. Until FY16, the banking system met 50% or more of this requirement.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">But in FY17, banks\u2019 share in new credit slumped to 35%, while non-bank sources met 65% of the financing requirement. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Non-bank sources lent as much as Rs. 9 lakh crore to businesses, dwarfing bank credit flow of Rs. 5 lakh crore. <\/span><\/li>\n<\/ul>\n<p><b>Improvement in Bond market buoyancy<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The bond market has seen a remarkable pickup in the last three years.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In FY17, public issues and private placements of corporate bonds (including commercial paper) raised Rs. 3.16 lakh crore for firms, a 56% jump from the Rs. 2.03 lakh crore in FY16. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">This took care of 22% of the total funding requirements of commercial enterprises.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">This number has almost doubled from Rs. 1.65 lakh crore in FY14. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">This data only includes the bonds directly floated by commercial enterprises, and not the money raised by finance companies for on-lending.<\/span><\/li>\n<\/ul>\n<p><b>What has prompted the sudden takeoff of Public issues and private placements of corporate bonds? <\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">On the borrowing side, firms have taken to bond issues to source more of their requirements because bond markets have transmitted the recent fall in interest rates much more quickly and effectively than banks. In the last couple of years, it has been much cheaper for high-quality corporate borrowers to tap bond markets.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">On the lending side, retail savings flooding into mutual funds, insurance firms and pension funds have helped stoke the domestic institutional investors\u2019 demand for bonds.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">These trends, taken with active efforts by the RBI, suggest that bond markets may continue to remain a leading source of credit to businesses, offering stiff competition to banks. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The only caveat is that the bond market route is more accessible to large enterprises with good credit ratings, than SMEs or borrowers with low ratings.<\/span><\/li>\n<\/ul>\n<p><b>Scale-up by NBFC<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Non Banking Finance Companies (NBFCs) have emerged as key financiers to businesses, especially MSMEs. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">NBFC lending jumped 28% over FY16.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">For long, it was a sore point with entrepreneurs that the large corporate borrowers ended up cornering the lion\u2019s share of bank credit, with lending procedures effectively keeping out Micro Small and Medium Enterprises. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In the last three years though, wholesale NBFCs have aggressively stepped into the breach. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Leveraging their deep regional reach, closer relationships with customers and alternative credit appraisal systems, NBFCs have driven a manifold expansion in loans against property and unsecured business loans to MSMEs.<\/span><\/li>\n<\/ul>\n<p><b>Factors that led NBFCs to expand<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A Crisil study in 2016 noted that NBFCs had gained a 3 percentage point share of overall credit pie from banks in the last three years as a result of their mortgage and MSME lending push, and would continue to gain share over the next three years. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Housing finance NBFCs have emerged as a major source of funds for real estate developers too, with financial institutions such as LIC, SIDBI, National Housing Bank and NABARD playing a complimentary role in funding other businesses.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Two factors have helped NBFCs expand their lending activities at the cost of banks &#8211; their comfortable capital adequacy ratios and their ability to borrow at lower costs due to falling interest rates. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In the last couple of years, NBFCs have been even more aggressive than corporates in tapping the bond markets for capital. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">They have also augmented their resources by borrowing from banks and institutional investors through securitisation deals. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Lately, there is worry the sluggish property market will force NBFCs to tread more cautiously on loans against property.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It is \u00a0important that rather than External Commercial Borrowings or short-term credit, it is the more durable FDI money that is meeting this need.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It is essential to recognise that these cannot completely substitute for bank lending. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The other useful takeaway from the analysis is that one can no longer assume a one-to-one correlation between bank credit growth and the GDP growth numbers. <\/span><\/li>\n<li><span style=\"font-weight: 400;\">To really measure credit expansion in the economy, we need data on both bank and non-bank lending.<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Who\u2019s lending to Indian businesses?: Brief overview Banks share in the new credit have fell in FY1. Corporate bond issuances have rose 56% and NBFCs have lent more. Abou RBI\u2019s annual report The banks are busy chipping away at their mountain of bad loans and operating on precarious levels of capital. Reserve Bank of India\u2019s&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/whos-lending-to-indian-businesses\/\">Continue reading <span class=\"screen-reader-text\">Who\u2019s lending to Indian businesses?:<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-34979","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704817325},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/34979","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=34979"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/34979\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=34979"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=34979"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=34979"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}