Industry
NBFCs turn to other avenues as bank credit slows on repeated RBI warnings
Summary
- Top NBFCs have seen the share of bank credit in their total debt fall significantly in July-September FY25 compared with FY24-end and the year ago period.
India’s non-bank financiers have heeded calls from the Reserve Bank of India to diversify their borrowing profile and are now gradually moving towards more market borrowings and other avenues such as overseas borrowing and securitization or asset sales instead of relying solely upon bank loans.
Top NBFCs have seen the share of bank credit in their total debt fall significantly in July-September FY25 compared with FY24-end and the year ago period. Led by RBI's repeated cautions on rising interconnectedness between banks and NBFCs and following the increase in risk weights for bank lending to NBFCs.
This share is expected to fall further in Q3, in-line with bank credit to NBFCs falling to 6.4% in October 2024 from 18.3% a year ago, according to RBI data.
After repeated warnings over the past two years by the central bank with respect to inter-connectedness between banks and NBFCs and the latter’s increasing reliance on banks, the central bank in its September bulletin noted that NBFCs have diversified their funding sources and reduced their borrowing from banks following the increase in risk weights.
Flagging unprecedented growth in certain segments of unsecured loans, RBI had in November 2023 increased risk weights on some such loans by banks and NBFCs by 25%.
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“The top 10 NBFCs have a fund demand of ₹2 trillion in FY25, which is about 20% growth on year. Another ₹2.5 trillion of debt will come up for repricing, which puts total demand from these top 10 NBFCs—comprising about 75% of the market—at around ₹4.5 trillion," said Jinay Gala, director, India Ratings & Research.
The ratings agency expects the share of bank credit in NBFCs’ borrowing profile to fall to around 50% in FY25 from around the earlier 55-60%. This implies that NBFCs will need to raise a large part of the funds from capital markets, securitization and external commercial borrowing (ECB).
In an October 2024 report, Icra Ratings had said that NBFCs continue to raise funding through securitization as it diversifies their borrowing liabilities and improves the asset-liability mismatch.
“We believe the market is on track to reach our estimate of ₹2.1 trillion (of overall securitization by banks and NBFCs) in FY2025 compared to ₹1.9 trillion in FY24," the agency had then said.
“ECB issuances have risen significantly, with their share in NBFCs’ borrowing mix rising by about 1.5 times on year. Securitization has also increased, NCD issuances have remained high whereas bank funding has gone down by about 200 bps," Gala said, adding that capital market borrowing will continue to see an uptick in H2 FY25 given the significant slowdown in bank credit. “Given the higher borrowing and refinance requirements in the second half, market borrowing will be far more."
While part of this demand will be fulfilled by institutional investors such as mutual funds and insurance companies, these entities largely limit their investments to ‘AA’ and higher rated debt. The remaining gap, due to the slowdown in bank credit, will need to be supported by capital markets, given also that higher marginal cost of funds-based lending rates (MCLR) of banks is making it more favourable and cost effective for NBFCs to raise funds through market borrowing, according to industry experts.
The 1-year median MCLR increased by 5 basis points on month to 9.00% as of November 2024. On year, the median 1-year MCLR was up 30 basis points (bps) whereas it was around 80 bps higher than pre-pandemic levels in March 2020.
Of the total issuances of ₹7 trillion so far in FY25 (as of 12 December), debt raised by NBFCs stood at ₹4.3 trillion accounting for 61% of total debt. In comparison, NBFCs had issued bonds worth ₹6.3 trillion, comprising 62% of the total fund issues of ₹10.2 trillion, as per data provided by Prime Database.
As per a 10 December 2024 report by CareEdge Ratings, the trend of credit extended by banks to NBFCs, which had shown a consistent upward trend for nearly six years and accelerated alongside the reopening of economies after the covid pandemic, has reversed.
Banks' outstanding credit exposure to NBFCs stood at ₹15.4 trillion as of October 2024, up 6.4% on year. This rate of growth was nearly a third compared to the growth rate reported in October 2023. Since December 2023, advances to NBFCs have lagged overall bank credit growth, slowing down to 1.0% in October 2024. As a result, the proportion of NBFC exposure to aggregate bank credit fell from 9.4% in October 2023 to 8.9% in October 2024, the report said.
