« Back to articlePrint this article

Headwinds ahead for NBFCs

September 27, 2023 11:58 IST

In August, the Reserve Bank of India Governor Shaktikanta Das held a meeting with chief executive officers/ managing directors (CEOs/ MDs) of large non-banking financial corporations (NBFCs).


Illustration: Uttam Ghosh/

The discussions included diversifying borrowing sources for NBFCs and housing finance companies (HFCs) to contain increasing reliance on bank borrowing, risks associated with high credit growth in retail segment in unsecured loans, prioritising IT upgrades and cyber-security, imp­roving provisioning, monitoring of stressed exposures and slippages, ensuring robust liquidity and asset-liability management, ensuring tra­n­sparency in pricing, creating rob­ust grievance redress mechanisms.

Given that acceleration of GDP growth requires a rebound in consumption, NBFCs are critical in terms of credit delivery.

Several analysts have examined the asset-liability profile of NBFCs in the recent past.


An analysis by Nomura indicates cost of funds (CoF) rose by 10-15 basis points (bps) in the first quarter of the 2023-24 financial year (Q1FY24) and CoF is likely to continue rising to peak 30-40 bps above Q1FY24 levels by Q3FY24.

If policy rates are cut in the first half (H1) of FY25, the effects on CoF would be lagged, filtering through only in H2FY25.

The projected CoF hike is more than the guidances offered by most NBFCs, implying there could be earnings downgrades if net interest margin/net interest income (NIM/NII) compress.

As of FY23, bank funding to NBFCs and HFCs constituted 57 per cent and 44 per cent, respectively, of their total borrowings.

MCLR (marginal cost of funds based lending rate) linked loans are still being repriced upwards with a lag although the RBI has hit pause on policy rates.

Bank loans to NBFCs/HFCs almost tripled between FY18 and July, 2023, to Rs 13.7 trillion in July, 2023, rising at a compound annual growth rate (CAGR) of 21 per cent, versus 12 per cent for overall bank credit.

Public sector undertaking banks hold around 65 per cent of market share in lending to NBFCs and HFCs.

NBFCs and HFCs have 10 per cent share of all bank loans, up from 6 per cent in FY18.

NBFCs also borrow from insurance companies (18 per cent) and mutual funds (17 per cent), with only 8 per cent of total liabilities from other sources.

Bank funding to NBFCs and HFCs reached 64 per cent of their aggregated net worth in Q1FY24, vs 35 per cent in FY17.

But PSU bank exposure to the sector is around 102 per cent of the PSU banks’ aggregated net worth.

NBFCs’ reliance on bank funding may reduce as they look to the bond market or securitisation.

The RBI wants bank exposures to reduce, since NBFCs have a lot of unsecured debt — mostly personal loans (PLs) — with relatively high default rates.

The central bank has limits of 20 per cent and 25 per cent of tier 1 capital exposure towards a single NBFC or NBFC group.

Several banks are near these limits.

So, we have a scenario where large NBFCs are effectively subject to bank-like regulations and likely to see NIM compression in the next few quarters.

However, large NBFCs have also become multiproduct, diversified lenders and aggressively paired up with fintechs to gain market share.

Across the industry, assets under management could grow at CAGR of over 20 per cent until FY26.

There may be some stress in unsecured personal loans, and the central bank is trying to pre-emptively plug gaps there.

The highest levels of defaults are likely in PLs sourced through fintechs.

There’s a very wide variance within these broad trends and analysts differ significantly in their ‘buy’/’sell’ recommendations where individual large NBFCs are concerned.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Devangshu Datta
Source: source image