Historically, the banking sector has played a preeminent role in facilitating flow of resources to the commercial sector in India. However, this is currently under challenge as credit disintermediation, bypassing banking channels, has attained a critical mass, highlights a study by the Reserve Bank of India. In the year 2011, the share of bank loans in credit to the commercial sector was around 56 per cent, followed by a share of 44 per cent by the non-bank sources of credit, which includes commercial paper, corporate bonds and external commercial borrowings. Interestingly, in 2017, the trend saw a reversal - the banks' share plummeted to around 38 per cent translating into a rise in the share of non-bank sources to 62 per cent.
There is a gradual shift in corporate borrowings from banks to mutual funds as reflected in the contraction in corporate spreads for near-investment grades.
The significant increase in inflows into mutual funds and their subsequent deployment is altering the scope of disintermediation in India. "The dramatic growth in resources flowing to mutual funds suggests that there is a discernible shift in the pattern of deployment of financial savings in India. The flow of liquidity into debt-oriented mutual funds has given rise to a swelling of money market mutual fund corpus," the study points out.
The rise of bank disintermediation in corporate credit does enable the financial system to become robust and more efficient in allocating risks. The unintended consequence of this process could potentially force banks, concerned with the shift in higher-rated borrowers to mutual funds, to either lower their credit standards or to engage in pricing that does not truly reflect their cost of funds.