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Interest Rates Drive A Sharp Uptick in Deposits at NBFCs

Attractive interest rates offered on deposits by non-banking financial companies appear to be driving a sharp uptick in the amount of deposits held with the shadow lenders.

Currently at Rs 70,754 crore, deposits held by NBFCs have grown over 40% since financial year 2019-20. The growth comes despite the number of NBFCs accepting deposits shrinking to 41 in 2021-22 from 271 in 2011-12.

“The higher rate of interest offered by NBFC on deposits compared to commercial banks is the main reason behind the growth,” Pankaj Mathpal, founder of wealth management firm Optima Money, told BQ Prime. Even though small finance banks also offer comparable interest rate on deposits, their offerings haven’t proven as lucrative.

Bajaj Finance Ltd., Sundaram Finance Ltd., Shriram City Union Finance Ltd. and Mahindra & Mahindra Financial Services Ltd. are the leading deposit-taking NBFCs that have been successful at attracting considerable deposits, according to Raman Aggarwal, director at Finance Industry Development Council, a representative body for NBFCs. Bajaj Finance alone has a deposit base of Rs 30,800 crore, according to the firm’s financial results for the quarter ended June 30.

“NBFCs push their fixed deposit products through intermediaries who get commission on deposits, whereas bank officials are more interested in selling life insurance products,” Mathpal said, highlighting how NBFCs have been able to attract considerable deposits in recent years.

While troubles at NBFCs like Srei Equipment Finance Ltd. and Dewan Housing Finance Corp. Ltd. may have shaken customer faith in NBFCs momentarily, “investors generally see such issues in isolation”, Mathpal said. The attractive returns NBFCs bring to the table are enough to drive the sales, he said.

The growth in deposits held by NBFCs also coincides with an increase in bank lending to such entities. Banks’ outstanding credit to NBFCs grew 27.4% year-on-year in July 2022, according to the Reserve Bank of India data.

Even though bank credit is a major liquidity tap for NBFCs, over-reliance on it isn’t an ideal situation, Aggarwal said. If there are issues with any one NBFC, it can result in banks getting risk-averse and dry up the liquidity causing pain for all NBFCs, he said. FDIC has been requesting the Ministry of Finance and the RBI to create a dedicate refinance window for NBFCs with a special carve out for small NBFCs, Aggarwal said.

“No fresh licence has been granted since the last 22 years,” he said. Despite the industry’s requests, the RBI hasn’t relented on its caution against allowing new NBFCs to accept deposits and hence the number of deposit-taking NBFCs isn’t likely to increase but “the number coming down may stop”, Aggarwal said.

Banks have begun to hike to interest rates on deposits in response to the RBI’s rate hikes and in order to shore up funds for lending but that upcycle is unlikely to blunt the allure of high-yielding NBFC deposits. “With the revision in repo rate, NBFCs have already started increasing interest rate on their loans as well as fixed deposits,” Mathpal said.

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