NBFCs' loan growth moderates significantly to 6.5% in H1FY24: RBI report

The corporate bond market remains a significant funding avenue for NBFCs, which are the largest issuers of bonds, with private placement being the preferred mode

Following the Reserve Bank of India (RBI) increasing risk weights on NBFC lending to certain consumer credit categories as well as on bank lending to NBFCs, loan growth of shadow banks moderated significantly during H1FY25 to 6.5 per cent on a half year – on – half year (H-O-H) basis in September 2024, RBI said in its Financial Stability Report. 

According to RBI, the impact of the moderation in credit was particularly visible in the upper-layer NBFCs segment, which comprise primarily of NBFC-Investment credit companies, with high share of retail lending (63.8 per cent) in their loan book. However, middle-layer NBFCs, excluding government-owned NBFCs, maintained robust loan growth, especially in retail loan portfolios. 

 

Meanwhile, credit growth of the sector slowed down to 16 per cent from 22.1 per cent on a year – on – year (YoY) basis.

The report also noted that amid a slowdown in direct bank funding, Non-Banking Financial Companies (NBFCs) are increasingly turning to the bond market to raise capital. Data for September 2024 shows that bank funding for upper-layer NBFCs, including direct borrowing, commercial papers, and debentures, decreased to 34.6 per cent from 35.8 per cent. For middle-layer NBFCs, bank funding dropped to 26.3 per cent from 26.7 per cent. 

“The growth of bank borrowings in NBFCs’ liabilities also declined from 26 per cent to 17 per cent; reliance on non-bank sources raised their cost of funds”, RBI said in its report. 

Separately, the report highlighted in the corporate bond market, NBFCs remained the largest issuers, with private placement being the preferred mode for bonds listed on recognized exchanges.  

Amidst moderation in direct funding from banks, NBFCs attempted to diversify their funding sources through higher issuance of listed non-convertible debentures (NCDs).

 

Further, NBFCs are also increasing their foreign currency borrowings to diversify their sources of funds and contain overall costs. Having said that, RBI has cautioned that the rise in foreign currency borrowings could pose currency risks to these NBFCs to the extent they are unhedged.

 

Meanwhile, the report noted that the NBFC sector remains healthy with sizable capital buffers; robust interest margins and earnings; and improving asset quality. Having said that, write-offs have shown a rising trend, with a few outlier NBFCs showing significantly higher write-offs.

 

Additionally, the report highlighted that on the liquidity front, upper layer NBFCs are more vulnerable, given that they have a higher proportion of short-term liabilities to total assets in comparison with NBFC middle layer.

 

Meanwhile, the report highlighted that RBI's system-level stress test, conducted on a sample of 162 NBFCs to assess their resilience to credit risk shocks, estimated the one-year ahead gross non-performing asset (GNPA) ratio for the sector at 3.4 per cent under the baseline scenario, with a system-level Capital to Risk-Weighted Assets Ratio (CRAR) of 21.2 per cent. However, the CRAR of eleven NBFCs may fall below the minimum regulatory requirement of 15 per cent. Under medium and high-risk scenarios, income losses and additional provisioning would further reduce the sector's CRAR by 70 and 100 basis points, respectively.

 

Separately, the sector’s resilience to liquidity shocks, assessed by evaluating the impact of increased cash outflows coupled with declining cash inflows, showed that the liquidity mismatch over one year is expected to remain within 20 per cent, although a weak tail of NBFCs may experience higher mismatches under medium and high-risk scenarios.