NBFCs Diversify Funding Amid Increased Lending Risk Weights: RBI Bulletin

NBFCs Diversify Funding Amid Increased Lending Risk Weights: RBI Bulletin

Non-Banking Financial Companies (NBFCs) are diversifying their funding sources and reducing dependence on bank borrowings following the Reserve Bank of India's (RBI) decision to raise risk weights on these borrowings, as revealed in the central bank's September bulletin. In November 2023, the RBI increased the risk weight on NBFCs by 25 percentage points, aiming to prevent the buildup of potential risks in the sector.

The RBI bulletin stated, "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 borrowing from banks." While markets and banks have traditionally been key sources of funds for NBFCs, the central bank noted that larger NBFCs with strong balance sheets are now leaning more towards secured funding options. In contrast, mid-tier NBFCs are often resorting to unsecured sources at higher rates.

Data from the RBI indicates that in 2023, 85.8% of borrowings by upper-layer NBFCs came from secured sources, compared to 46.1% for middle-layer NBFCs. While dependence on bank borrowings has decreased, it remains a significant source of funding through both direct lending and the subscription of debentures and commercial papers issued by NBFCs.

The increase in risk weights on certain categories of retail loans may also require shadow banks, particularly those with a significant unsecured loan portfolio, to meet additional capital requirements. However, both upper and middle-layer NBFCs remain well-capitalized, suggesting their readiness to meet regulatory demands. The asset quality in the sector has shown improvement, with middle-layer NBFCs maintaining adequate provisions for riskier loans, lowering their net non-performing asset (NPA) ratio below that of their upper-layer counterparts.

Government-owned NBFCs and mid-tier non-government NBFCs focused on retail credit lines have shown better asset quality, with secured retail loans such as gold, vehicle, and housing loans continuing to grow robustly. The RBI noted that the NBFC sector remains resilient under the scale-based regulation (SBR) framework. As of December 2023, the sector demonstrated double-digit credit growth, sufficient capital, and low delinquency rates.

The extension of prompt corrective action (PCA) norms to government-owned NBFCs, effective from October 1, 2024, is expected to further strengthen the sector. The PCA norms have already been in place for other NBFCs since October 2022. The RBI emphasized that NBFCs need to remain proactive in identifying and managing risks to ensure sustained growth in the future.