Decoding The Credit Flow – Tightening Liquidity, Rise In Rates Favorable For Banks Vs NBFCs: Nirmal Bang’s Thematic View

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Our analysis suggests that the incremental flow of credit to the commercial sector in the first half of FY23 is at a multi-year high compared to the recent past.

Additional credit flow in the first half of FY23 amounted to Rs 8 tons, led by bank credit flow of Rs 7.4 tons. In contrast, corporate bond issuance, which had peaked at Rs 1.5 tonnes in the first half of FY21 due to falling interest rates, has now slowed to a trickle.

The additional credit flow from banks, while being driven by retail credit, is now becoming more widespread, services (mainly non-banking financial corporations), industry (especially micro, small and medium enterprises) and agriculture also contributes.

While the recovery in credit bodes well for banks, we expect pressure on net interest margins with credit growth well above deposit growth and a credit-to-deposit ratio hovering around 75%.

Meanwhile, NBFCs have turned to banks for their funding needs, but banks’ exposure to NBFCs is now hovering around all-time highs.

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