NBFCs Seek Alternative Funding Sources as Bank Loans Slow CRISIL Reports

NBFCs Seek Alternative Funding Sources as Bank Loans Slow CRISIL Reports

As bank loans become harder to secure, non-banking financial companies (NBFCs) are increasingly turning to alternative funding options such as non-convertible debentures (NCDs), commercial papers (CPs), foreign currency borrowings (FCBs), and securitization to sustain their growth. This shift comes in response to challenges in obtaining bank loans, particularly after risk weights on bank lending to higher-rated NBFCs were increased last year.

According to a recent study by CRISIL Ratings, which analyzed over 110 NBFCs representing more than 95% of the sector’s assets under management (AUM), the share of bank loans in the sector’s total borrowings has dropped by approximately 60 basis points to 47.0% for the quarter ending June 30, 2024. This decline is more pronounced among NBFCs rated 'A and below' compared to those in the 'AAA' and 'AA' categories.

Malvika Bhotika, Director at CRISIL Ratings, noted that while banks will continue to be the primary funding source for NBFCs, the bond market is expected to gain market share in the near to medium term. The share of NCDs in the sector's borrowings rose by around 30 basis points to 28.5% in the June quarter, particularly among 'AAA' and 'AA' rated entities. Even those rated 'A and below' are exploring bond market opportunities, with their share of NCDs increasing by approximately 40 basis points during the quarter.

CRISIL highlighted that the expected repo rate cuts could make the bond market even more appealing for NBFCs. Improved investor confidence, bolstered by stronger balance sheets and healthy liquidity, is likely to support NBFC issuances, as many companies maintain liquidity coverage ratios well above regulatory requirements.

To facilitate growth, NBFCs are expected to continue diversifying their funding sources. This diversification is essential to optimize borrowing costs, especially since bank funding has become more expensive, rising by 20 to 50 basis points in recent quarters. Alternative funding avenues such as CPs, FCBs, and securitization collectively accounted for 16.1% of the sector’s borrowings as of June 2024.

The report also noted an uptick in CP issuances, with overall volumes returning to levels not seen in nearly five years. Outstanding investments by mutual funds, a significant investor in CPs, reached a six-year high in July 2024. Securitization volumes also increased, totaling ₹1.9 lakh crore in fiscal 2024.

Rounak Agarwal, Associate Director at CRISIL Ratings, stated that securitization will remain a preferred method for NBFCs to raise funds. Interestingly, issuers rated 'A and below' have partially mitigated the decline in bank borrowings through increased securitization, with their share rising by about 30 basis points in the June quarter. Conversely, 'AAA' and 'AA' rated issuers have leaned more on FCBs, benefiting from lower hedging costs, with the share of FCBs in overall borrowings rising by 50 basis points to 5.3%.

Looking ahead, CRISIL Ratings expects NBFCs to maintain a diverse funding mix while keeping an eye on any regulatory changes that could impact their ability to raise resources and influence their overall funding strategies.