Bank lending to Indian NBFCs virtually nil

RBI regulatory tightening blamed for slowdown.

Indian banks' lending to non-banking finance companies or NBFCs has virtually ground to a halt due to the combined impact of regulatory tightening by the Reserve Bank of India, the central bank, and poor business.

Growth in bank lending to NBFCs dropped to 1.9% in the 12 months ended June 2013 compared with 44% in the same period last year, said RBI.

The plunge in bank lending is more evident in the three months ended June, when banks lent just US$3.27 million to NBFCs or a growth of 0.8% against a 11.4% growth in the year-ago period.

Banks have turned risk-averse to NBFCs after RBI tightened rules for these companies to curtail their rapid growth.

RBI’s removal in 2011 of NBFC’s priority sector tag for bank loans substantially raised the cost of funds for NBFCs.