It is the end-use of funds borrowed by non-banking finance companies and fixed maturity plans of mutual funds that are making banks wary of lending to them.
Bankers said their reluctance stems from the lack of control over the end-use of the funds. In recent weeks, they have been particularly careful while lending to finance companies that on-lend to the housing and transport sectors.
"When banks lend to an NBFC, they do not have any control over the quality of the end assets. In such cases, the loan-to-value ratio is inadequate and, particularly when there is a slowdown, the security coverage also falls," said a public sector bank chief.
For instance, a loan of Rs 1 million may have been given against a house, which was valued at Rs 1.5 million. At a time when property prices are falling, it is quite possible that the value of the house has fallen to Rs 1 million and, in case of a default, there is an inadequate cover.
In case of direct lending by banks, executives said, they have been more careful and have done better due diligence, which many NBFCs have not done.
In addition, while banks would have extended loans to NBFCs at around 8 per cent a year ago, these companies, in turn, would have lent the funds at a higher cost. At a time when interest costs are rising for banks, they are rolling over these funds at double-digit rates, which, in turn, is putting additional pressure on NBFCs.
A senior executive at a large bank said lenders are particularly cautious while lending to non-deposit-taking NBFCs.
"Deposit-taking NBFCs are not a problem as they have an obligation towards the depositors, but in case of non-deposit-taking companies, there is an underlying risk as they simply park their funds in the market through commercial papers," the executive said.
A public sector bank executive said there is some hesitation to lend to mutual funds as well since fixed maturity plans are in a tight spot. The part of the FMP corpus, which has been deployed in real estate, and NBFCs are most vulnerable at the moment. "Any default by FMP clients could put pressure on us, including the risk default by mutual funds in extreme circumstances," said a bank executive.
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