Loan growth for Non-Banking Financial Companies (NBFCs) slowed to 6.5% in the first half of fiscal year 2025, according to the Reserve Bank of India’s Financial Stability Report. This decline is linked to the RBI’s raising risk weights on lending for certain consumer credit types and on bank lending to NBFCs.
The slowdown was most noticeable in upper-layer NBFCs, which focus heavily on retail lending, making up 63.8% of their loans. In contrast, middle-layer NBFCs, excluding government-owned firms, showed strong loan growth, especially in retail loans.
Overall, the sector’s credit growth dropped to 16% from 22.1% year-on-year. The RBI noted that NBFCs are shifting funding sources and increasingly turning to the bond market as direct bank funding decreases. In September 2024, bank funding for upper-layer NBFCs fell to 34.6%, while for middle-layer NBFCs it dropped to 26.3%.
Bank borrowings for NBFCs also decreased from 26% to 17%, causing a rise in their funding costs. NBFCs maintained a strong presence in the corporate bond market and preferred private placements for bonds listed on recognized exchanges.
To maintain liquidity and meet capital needs, NBFCs began issuing more listed non-convertible debentures (NCDs) in light of reduced direct bank funding.
The RBI previously advised shadow banks to diversify their funding sources to manage risks. This recommendation arose after the IL&FS crisis, which caused liquidity issues, reduced market confidence, and led to lower borrowing capabilities for NBFCs, increasing their reliance on banks, particularly during the pandemic.
In November 2023, the RBI raised the risk weight for bank funding to NBFCs from 100% to 125%. The central bank cited the rapid growth in consumer credit and the growing dependence of NBFCs on bank loans as reasons for this change. This regulation has encouraged NBFCs to seek alternative funding options.