Why NBFCs Should Reduce Taking Loans from Banks

Finance Minister Nirmala Sitharaman and Reserve Bank of India (RBI) Governor Shakthikanta Das have urged non-bank financial companies (NBFCs) to diversify their funding sources, reducing their excess dependency on banks. According to a report by Livemint, the instructions have come despite the NBFCs being in a better position with higher asset quality and capital ratios in the second half of FY23.

In light of the Centre for Advanced Financial Research and Learning”s (CAFRAL) warning that NBFCs” too much dependency on banks may trigger systemic risks in the entire financial sector, the central bank and finance ministry asked NBFCs to adapt adequate safeguards.

According to the report, the RBI wants to tame the NBFCs in order to avoid a possible financial crisis contagion in the financial system, given that NBFCs hold heavy exposure to banks.

Funding Sources of NBFCs
Bank credit constitutes 41.2% of total borrowings from NBFCs. It is a bit lower compared to the 41.4% exposure in the 2022 calendar year; however, it is significantly higher compared to the 39.6% registered on March 31, 2022.

The second largest funding source of the NBFCs is market borrowings, with a 38.8% share of total borrowings in March 2023, which is a significant decrease compared to 41% in March 2022.

NBFCs exposure to banks boomed to Rs 12.3 trillion at a compound annual growth rate (CAGR) in September, according to a note by Crisil Ratings, which is an 18% increase in the past five years. Banks also have exposure to NBFC bonds, and with this, NBFCs become the largest net borrowers in the financial system.

NBFC Performance
NBFCs have improved their asset quality and capital ratios in the second half of FY23. Their capital adequacy ratio has increased by 50 basis points to 27.5% between September 2022 and March 2023, while their gross non-performing asset (NPA) ratio dipped 160 basis points to 3.8%. Special-mention accounts, or loans, which refers to loans on which repayments are delayed, have been reduced by 470 bps in the same period.

NBFCs have also shown a significant increase in lending, with gross loans witnessing a surge to 16.1% in FY 2023 on the back of personal loan growth of 31.3%. The asset under management of NBFCs is estimated to grow to 16–18% in FY 2024 and 14–17–17% in FY25, according to the Crisil Ratings.