NBFCs are a Challenge to Banks

Banks are now put to Litmus Test.  Ofcourse, Bank deposits have drastically seen a decline.  They face a challenge in mobilising deposits from their non-banking competitors NBFCs (Non-Banking Financial Companies), who are able to pay higher than banks on the bonds invested.  Here are the details:

1. Aggregate bank deposits have shrunk by Rs. 4410 crores in the fortnight ending March 15, 2019.
2. This has created a great problem in the bankers’ mind, with half a dozen NBFCs watching to mobilize about Rs. 3000 crores in non-convertible debentures (NCD) portfolio.
3. Additionally, small savers also have preferred to shift their option to equities and mutual funds, which has otherwise resulted in the banks holding on to the deposit rates, though RBI has advised them for a softer interest rate cycle.
4. Banks are now forced to compete with Srei Infrastructure Finance, Magma Fincorp, Shriram City Union Finance and Muthoot Homefin, who are in the look out to mop up around Rs. 2050 crore in the coming three weeks.
5. Incidentally L&T Finance has already raised funds through NCDs to the tune of Rs. 1000 crores.
6. According to SREI, who have plans to raise Rs. 500 crores through bond market, it is believed that due to recent rate cuts by RBI NCDs are well priced and are preferred by the retail investors
7. The companies normally offer coupon ranging from 8.6% to 10.75% which is well above the banks’ offerings.
8. To quote, State Bank of India offers a maximum of 6.85% for a 5-year deposit, and Bandhan Bank offers a maximum of 7.65% for a deposit running for 18 months but less than 2 years.
9. RBI had reported that there was reduction in the bank deposits in the last reporting fortnight, however bank deposits had shown a trend of 10% annual growth on a long term.
10. This is in similar lines to the pre-demonetization periods, however, the loans portfolio has not growth.
11. The challenge is seen in the structure of deposits and also in the lending markets. Here, the shift in market share of deposits is observed to be slower to private banks compared to loans, more so large ticket corporate loans.
12. Of course, no doubt competition has seen the banks reducing the deposit rates and tighter liquidity conditions have compelled NBFCs to offer higher rates on NCDs.

Note: 

1. Shiram City Union Finance is in the market to raise around Rs. 750 crore
2. Magma is proposing to mop up around Rs. 500 crores
3. Muthoot Homefin is expecting to mobilise around Rs. 300 crores.
4. Also these targets also aim to retain over subscriptions.