Non-banking financial companies (NBFCs) must find new funding sources to reduce their reliance on banks, according to a Reserve Bank of India (RBI) report. The report notes that while banks still provide significant funding, their share of NBFC borrowings has decreased from 43.1% in March 2023 to 42.7% in March 2024 due to reduced bank subscriptions to NBFC debentures.
The RBI believes that NBFCs becoming less dependent on banks is a positive sign for financial stability, although banks remain the main funders. After the IL&FS crisis, NBFCs struggled with liquidity issues, as lost confidence and credit downgrades limited their market borrowing options, forcing them to rely more on banks, a situation worsened by the pandemic.
In response to growing concerns over this dependency, the RBI raised the risk weight for banks funding NBFCs from 100% to 125% in November 2023, which has led to a slight reduction in bank reliance.
To adapt, many NBFCs are turning to the domestic debt capital market for funding as bank loans have decreased. Higher-rated NBFCs have successfully issued bonds and commercial papers, while some have also accessed the international bond market. In addition, many are using securitization to gather funds for growth.
The report shows that NBFCs increased their issuance of non-convertible debentures (NCDs) in 2023-24, with over 80% of these being high-rated. Borrowing through commercial papers also rose during the same period.
Growth in secured borrowings for NBFCs slowed down in 2023-24, while unsecured borrowing increased mainly through market debt instruments. The middle layer of NBFCs is relying more on unsecured funds, partly due to government-backed NBFCs.
The RBI warns NBFCs against pursuing rapid growth without considering risks, urging robust risk management practices. The central bank has also recommended that NBFCs improve customer service and avoid excessively high-interest rates to stay relevant.
In October, the RBI prohibited four NBFCs, including two microfinance institutions, from issuing loans due to unfair interest rates. This decision followed concerns about their pricing practices not meeting regulatory standards.
The RBI’s report also emphasizes that NBFCs should be aware of risks related to concentration and climate change, as well as cybersecurity threats.
Despite these challenges, the report indicates that financial performance metrics like return on assets (RoA) and return on equity (RoE) for NBFCs improved in 2023-24 across all categories, benefiting from better operational efficiency and risk management.
The NBFC sector showed improvements in asset quality and capital adequacy during 2023-24. By the first half of FY25, the gross and net NPA ratios fell to 3.4% and 1.1%. The sector’s balance sheet also grew significantly, increasing by 16.3%, compared to 17.2% the previous year. On the asset side, loan and advance growth picked up to 18.5% in 2023-24, up from 17.4% in 2022-23, mainly due to upper-layer NBFCs. However, credit growth among middle-layer NBFCs was limited due to a drop in unsecured loans.