NBFCs Turn to NCD Market as RBI Tightens Bank Credit

NBFCs Turn to NCD Market as RBI Tightens Bank Credit

Non-banking financial companies (NBFCs) in India have significantly increased their reliance on non-convertible debentures (NCDs) to raise funds, following the Reserve Bank of India’s (RBI) move to impose stricter lending guidelines on banks. The surge in NCD issuances is evident in the 83% increase in funds raised through this route, which reached ₹34,490 crore in September 2024, compared to ₹18,775 crore in July 2023.

The growth in NCD issuances has been substantial despite the exit of a key player, HDFC, from the corporate debt market following its merger with HDFC Bank on July 1, 2023. Before the merger, HDFC held a 10% share of the market, with NCD issuances amounting to ₹97,415 crore in the financial year 2022-23. Post-merger, the combined entity has ceased issuing NCDs, leading other NBFCs to step in and fill the gap.

Factors Behind the Rise in NCD Issuances

Several factors have contributed to the sharp rise in NCD issuances. According to a treasury official at a housing finance company, "Healthy business growth has instilled confidence among investors, encouraging them to support NBFCs through NCDs. Moreover, the cost of raising funds via NCDs is comparable to that of bank loans, making this route an attractive option."

The liquidity coverage ratio (LCR) of NBFCs, which is well above regulatory requirements, has also helped boost investor confidence, ensuring that these companies can raise funds more easily. The demand for credit, particularly from housing finance companies, has contributed to the increased issuance of NCDs. Anand Mehta, Vice President of Debt Capital Markets at LKP Securities, noted, "Overall volumes have remained high due to strong demand for credit, and incremental demand from housing finance companies has fueled the rise in NCDs."

Impact of RBI’s Regulations on Bank Lending

One of the key reasons behind NBFCs turning to NCDs is the tightening of bank credit due to the RBI’s new guidelines. Bank lending to NBFCs grew by 11.9% year-on-year in August 2024, a significant drop from the 21.3% growth seen a year earlier, as per RBI data. To sustain their growth, NBFCs have had to explore alternative funding options, such as NCDs, commercial papers, foreign currency borrowing, and securitization.

Earlier in 2024, the RBI introduced new guidelines that required banks to increase the risk weightage on loans to NBFCs by 25 basis points, raising it to 125%. This move was aimed at moderating bank lending to the sector. Additionally, sources indicate that bank credit to NBFCs may slow down even further once the proposed liquidity coverage ratio (LCR) norms under Basel III are enforced in April 2025. These draft guidelines are expected to make it more difficult for NBFCs to access cheaper bank credit, compelling them to seek alternative funding sources such as NCDs.

Conclusion

With stricter regulations and limited access to bank credit, NBFCs are increasingly turning to the NCD market as a viable alternative for raising funds. The surge in NCD issuances highlights the growing importance of this funding route as NBFCs continue to navigate a more challenging regulatory environment. As the RBI prepares to implement the new LCR norms, NBFCs will likely continue to rely heavily on NCDs, commercial papers, and other alternative sources of financing to sustain their growth.