Bank credit to NBFCs zooms by 55.6%

Despite the central banks concerns,bank credit to non-banking financial companies continues to grow at a robust pace.

Despite the central banks concerns,bank credit to non-banking financial companies (NBFCs) continues to grow at a robust pace. Bank lending to the NBFC sector rose sharply by 55.6 per cent y-o-y for the month of July on the back of a 44.5 per cent y-o-y growth in June,data on sectoral credit released by the Reserve Bank of India (RBI) on Tuesday showed. The RBI had recently withdrawn priority sector status for bank credit to NBFCs for the purpose on on-lending.

However,the increase in loans to the commercial real estate sector moderated to 17.1 per cent y-o-y from 23.2 per cent y-o-y in the previous month. Consumer loans too,saw moderation in growth at 15.4 per cent y-o-y in July from 17.3 per cent y-o-y in the previous month. Growth in the services sector continued to grew at 21.3 per cent y-o-y in July 2011. Credit deployment to industry,which includes loans given to the infrastructure and metals sectors,grew at a slower pace of 21.2 per cent as compared with 27.7 per cent in the previous year.

Meanwhile,the credit growth to the agriculture sector moderated slightly to 11.8 per cent in July from 12.8 per cent in the previous month. The overall non-food credit grew 18.9 per cent in July,a shade lower than 20 per cent growth posted during July 2010.

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While reviewing monetary policy in July,the central bank had scaled down the non-food credit growth for the banking system to 18 per cent for 2011-12 from 19 per cent earlier. It also cut its GDP growth forecast to 8.2 per cent for the fiscal from 9 per cent.

The growth in non-food credit growth so far this fiscal is not too encouraging yet; non-food credit between till August 12,2011 has grown by just 2.6 per cent as against a 3.8 per cent growth in the same period a year ago. Banks lent an amount of Rs 1,01,633 crore during this period,lower than Rs 1,21,284 crore lent in the corresponding period of last year.

In its financial stability report June 2011,the RBI drew attention to the fact that many NBFCs,which are borrowing both from the markets and the banks,have the capability of being overleveraged and,being deeply interconnected,can pose systemic risks. Differences in regulatory requirements for such entities vis-a-vis the banking sector and between NBFCs under the purview of different regulators add to the scope for regulatory arbitrage, the RBI had noted.

The RBI had also expressed concerns over the lopsided growth in advances to retail,commercial real estate and infrastructure sector. As each of these sectors have a peculiar set of asset quality propositions,the brisk growth in exposure seen during 2010-11 poses some concerns, the RBI said adding the contribution to the credit growth was disproportionately high for each of these sectors.

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The RBI also expressed concerns on the faster deterioration in the asset quality under priority sector lending. The gross NPA ratios for the agriculture segment rose to 3.3 per cent in March 2011 as against 2.4 per cent in March 2010.