NBFCs diversify funding sources amid increased lending risk weights

The asset quality of government-owned NBFCs and non-government-owned middle layer NBFCs focused on the retail line of business was also higher

The Non-Banking Financial Companies (NBFCs) have diversified funding sources and reduced borrowing from banks after the Reserve Bank of India (RBI) increased risk weights on bank borrowings, according to the September bulletin.

In November 2023, the RBI raised the risk weight on NBFCs by 25 percentage points to pre-empt build-up of any potential risk in these segments.            

In the bulletin, RBI said: “In response to the recent increase in risk weights on bank lending to NBFCs, they have begun to diversify their funding sources and reduce excessive reliance on borrowings from banks.”

Markets and banks are key sources of borrowing for NBFCs. According to RBI, the upper layer NBFCs rely more on secured sources of funding owing to their strong balance sheet and market standing, whereas, the middle layer NBFCs resort to unsecured sources at high rates.

 

According to RBI data, out of total borrowings, the share of secured funds by upper layer NBCs account for 85.8 per cent in 2023 whereas that of middle layer NBFCs are 46.1 per cent.

Although the dependence on bank borrowings have reduced, it still continues to be a major source of funds for the sector both via direct lending and subscription of debentures and commercial papers (CPs) issued by NBFCs.

 “In an attempt to encourage NBFCs to broad base their fundraising and limit reliance on banks, the Reserve Bank had increased risk weights on bank lending to NBFCs in November 2023. Since then, there has been a sharp deceleration in NBFCs’ borrowing from banks, particularly by NBFCs-UL,” RBI said.

Further, the banking regulator said that due to the increase in risk weights on some categories of retail loans, the shadow banks with a large portfolio of unsecured loans may have to follow additional regulatory capital requirements. However, the sector as a whole, both NBFCs-UL and NBFCs-ML, remains well-capitalised, indicating their financial readiness to meet higher requirements.

The asset quality of the sector has also improved. Despite the gross Non-Performing Asset (GNPA) ratio of upper layer NBFCs being lower than that of middle layer, the latter maintained adequate provisions to account for their riskier loan portfolio, thereby bringing down their Net NPA ratio below that of the former.

The asset quality of government-owned NBFCs and non-government owned middle layer NBFCs focused on the retail line of business were also higher.

Further, the secured retail credit lines like gold loans, vehicle and housing loans, along with industry and service sector loans continue to exhibit robust growth.

The RBI also noted that the NBFC sector in India remains resilient under the scale-based regulation (SBR) framework. In December 2023, the sector continued to exhibit double-digit growth in credit, adequate capital and low delinquency ratio.

In addition, the recent regulatory measure of extension of prompt corrective action norms, which will be effective from October 1, 2024, to government-owned NBFCs is expected to further bolster the sector. It is already effective for other NBFCs from October 1, 2022.

RBI said that, going forward, NBFCs need to proactively identify and manage risks while also strengthening their assurance functions to ensure that the sector maintains a sustainable growth trajectory.