NBFCs turning to alternative funding sources amid slower bank loans

Non-Banking Financial Companies (NBFCs) are increasingly seeking alternative funding options such as non-convertible debentures (NCDs), commercial papers (CPs), foreign currency borrowings (FCBs), and securitisation, as access to traditional bank loans becomes more challenging. This shift has been spurred by changes in banking regulations, making it more difficult for NBFCs, especially those with lower credit ratings, to secure bank funding.

Decline in bank loans to NBFCs

According to a report by CRISIL Ratings, cited by The Financial Express, risk weights on bank lending to higher-rated NBFCs were raised in the previous year, leading to reduced availability of bank loans. The study, which covered over 110 NBFCs accounting for more than 95 per cent of the sector’s assets under management (AUM), revealed that the share of bank loans in the sector’s borrowings decreased by around 60 basis points (bps) to 47 per cent by the end of June 2024. The decline was more pronounced for NBFCs rated in the ‘A and below’ categories compared to those with ‘AAA’ and ‘AA’ ratings.

Malvika Bhotika, director at CRISIL Ratings said, “Although banks will continue to be the main source of funding for NBFCs, the bond market is expected to gain a larger share in the near to medium term.” She added that the share of NCDs in the sector’s borrowings had increased by 30 bps to 28.5 per cent during the same period, particularly among ‘AAA’ and ‘AA’-rated companies. Those in the ‘A and below’ category are also attempting to access the bond market, though their base remains smaller.

Growth in CPs and securitisation

NBFCs have increasingly turned to CPs and securitisation as alternative funding avenues. The CRISIL report highlighted that NBFCs must diversify their funding sources to sustain growth and optimise borrowing costs, especially as bank loans have become 20-50 bps more expensive in recent quarters. CP issuances by NBFCs have surged, with volumes returning to levels last seen five years ago, and mutual fund investments in CPs hit a six-year high in July 2024.

Securitisation has also gained momentum, with volumes reaching Rs 1.9 trillion in the 2024 financial year. Rounak Agarwal, associate director at CRISIL Ratings, said that securitisation will remain a key funding route for NBFCs, particularly for those in the ‘A and below’ rating categories, which have used this method to partially compensate for reduced bank lending.

Conversely, ‘AAA’ and ‘AA’rated NBFCs have favoured FCBs, benefiting from lower hedging costs, with the share of FCBs in their borrowings increasing by 50 bps to 5.3 per cent by June 2024.

Looking ahead, NBFCs are expected to maintain a diversified funding mix while closely monitoring regulatory changes that could impact their ability to raise resources.