Mutual funds investment in non-banking finance companies (NBFCs) debt instruments has reached near a six-year year high of ₹2.34 lakh crore in August, data compiled by businessline showed. Mutual funds, along with other investors including banks, had become extremely risk averse in funding NBFCs post IL&FS and DHFL crises in 2018 and 2019, respectively.
“In our analysis between March and June period, while we have seen a small drop in share of bank loans to NBFCs, NBFCs have managed to raise funds not only via capital market instruments but also through external commercial borrowing and securitisation,” said Ajit Velonie, Senior Director, Crisil Ratings.
“From investor side, mutual funds clearly are one of the largest buyers. The recent data shows that around ₹2.34 lakh crore of debt mutual fund investment was done in NBFCs. Last time we saw such a high figure was just around the IL&FS crises period,” he said, adding that the exposure could possibly rise to historic high of ₹2.65 lakh crore — registered in July 2018 — going ahead in FY25.
Why are NBFCs diversifying liability base
With the Reserve Bank of India’s (RBI) hike in risk weight on bank loans to NBFCs, and with State Bank of India (SBI) approaching regulator flagging multiple lender base of NBFCs, NBFCs have started to rapidly diversify their liability base.
“Due to hike in risk weights, banks may have reduced loan exposure to NBFCs to adjust for increased capital requirements. This may have prompted some NBFCs to access debt capital markets more frequently for funding requirements,” said Avnish Jain, Head of fixed income at Canara Robeco Mutual Fund.
Mansi Sajeja, Fund Manager-Fixed Income at SBI Mutual Fund, citing RBI data says that bank lending to NBFCs has come down from 10.4 per cent of non-food credit as on November 17, 2023 to 9.8 per cent as on July 26, 2024.
“NBFCs have also tapped US Dollar bond and ECB resources in the recent times to diversify their liability mix. In general, we have noted regulator’s concern on inter-linkages between bank and NBFC through lending relationship which could be “potential source of systemic risk” (RBI FSR- June 2024),” she said.
Rationale for MF investment in NBFCs
Sajeja says NBFCs have always been large issuers in the corporate bond market, however their relative attractiveness depends upon credit cycle, and spreads offered over sovereign and other AAA rated public sector units and public finance institutions (PFIs).
“In the last 3-4 months we have seen spreads over sovereign to be consistently above 100 bps (vs 70-75 bps in same period last year) and over PFIs (SIDBI, NABARD) to be around 50 bps (vs 40-45 bps same period last year). This combined with a neutral to positive view on credit cycle and healthy capitalisation of NBFCs has resulted in MF participation to increase in NBFCs,” she said.
Jain also said that NBFC typically provides a positive spread over similarly rated PSU bonds or non-financial company bonds. Per regulatory limits, a fund can invest up to 20 per cent of its net asset value (NAV) in NBFC issuers, and accordingly a fund manager may utilise investment in NBFCs to achieve portfolio returns.
Lakshmi Iyer, CEO – Investments & Strategy, Kotak Alternate Asset Managers, said the credit cycle in India has turned for the better, with domestic balance sheets getting deleveraged. “This is encouraging mutual funds to add some corporate bonds across rating spectrum into the portfolio. We have also seen government bonds yields shrink due to sustained FPI buying,” Iyer said.
“Added to that is the attractive spread in the vicinity of 75 to hundred basis points, even in AAA segment. This trend is likely to continue as the interest rate cycle in India, as is the case across the world, seems to be favourable,” she added.
