Non-banking financial companies (NBFCs) may witness a period of subdued growth as banks are slowing down funding following higher risk weights, amid tight liquidity conditions.
According to the latest Reserve Bank of India (RBI) data, the year-on-year (Y-o-Y) growth in bank credit to NBFCs dropped to 8.5 per cent in June compared to 16 per cent in May.
Additionally, data shows that incremental lending by banks to NBFCs has fallen to just Rs 7,420 crore in the April–June quarter of FY25 (Q1FY25). It is essentially due to banks running down their portfolios concerning state-owned finance companies.
In Q1 FY24, incremental bank lending to NBFCs was Rs 92,223 crore and in FY24 it stood at Rs 2.06 trillion.
In November last year, the RBI increased risk weights of banks lending to NBFCs, resulting in a slowdown in flow of credit growth to the sector.
According to RBI data, as on September 30, 2023, 37.8 per cent of the NBFC borrowing was from banks.
The NBFC sector may see a period of muted assets under management (AUM) growth or low disbursements.
“Given that bank funding constitutes a major portion of NBFC borrowing sources, the industry may experience a moderation in AUM growth in the near term,” said Anil Gupta, vice-president, financial ratings at ICRA.
Banks may also consider trimming low-yielding portfolios to public financial institutions, thereby reducing credit flow to non-banks, he said.
Gupta added that with the upcoming liquidity coverage ratio (LCR) norms, banks are expected to moderate their asset growth, potentially impacting NBFCs further.
He added, “Banks are likely to prioritise deploying funds in granular and higher-margin segments, as against wholesale credit flow to NBFCs, which can also be finely priced.”
“With the bank lending to NBFCs in general getting constrained, on-lending of NBFCs to their customers is likely to moderate (due to RBI norms). This is because not all that NBFCs originate can get sold and there are seasoning norms prescribed before loans can be sold. So, many NBFCs may have to take their foot off the accelerator. Also, overall because of lesser funds to lend, it may push up the rates for customers,” said C V Ganesh, chief financial officer, Fedfina.
The regulatory action with respect to risk weight was in response to excessive growth in unsecured retail loans and the over-reliance of NBFCs on bank funding.
Additionally, given the pressure on deposit accretion amid high credit – deposit ratio, banks are looking to deploy their funds in high-yielding segments and trimming their portfolios which have fine margins.
Following RBI’s directives in November, NBFCs, especially public financial institutions, are increasingly looking to diversify their borrowing sources and reduce their dependence on banks. They plan to tap the domestic capital market or borrow internationally. Lower-rated NBFCs are increasingly looking at securitisation as a viable funding option.
Ajit Velonie, senior director, CRISIL Ratings, said, “Since November 2023, there has been a slowdown in bank credit growth to NBFCs largely on account of increase in risk weights on bank lending to NBFCs and on unsecured loans.
As a result, NBFCs have focused on diversifying their resource profile. They are increasingly relying on domestic capital markets, overseas borrowings, and securitisation to meet their funding needs.
He said, “With NBFCs turning cautious on unsecured segments, credit growth for NBFCs is expected to moderate to 15-17 per cent in FY25 against 20 per cent last financial year. NBFCs are also expected to focus on aligning growth rates to their ability to raise resources and optimally manage their asset-liability maturity (ALM) profiles.”
Umesh Revankar, executive vice-chairman, Shriram Finance said banks are reducing their exposure to NBFCs following RBI’s nudge.
“Bank credit to NBFCs has been slowing down over the past year, a trend that aligns with the RBI’s goal of reducing NBFC dependence on bank funding. The central bank has encouraged NBFCs to explore alternative market sources to raise funds. This shift is now occurring and will benefit the industry by prompting NBFCs to diversify their borrowing options,” Revankar said.