Mint Explainer: Why are the RBI governor and finance minister telling non-bank lenders to be cautious? | Mint

Mint Explainer: Why are the RBI and FM telling non-bank lenders to be cautious?

Reserve Bank of India Governor Shaktikanta Das (Photo: PTI)
Reserve Bank of India Governor Shaktikanta Das (Photo: PTI)

Summary

  • On Wednesday, RBI governor Shaktikanta Das said these lenders should diversify their sources of funding and not rely too much on bank loans

Mumbai: Finance minister Nirmala Sitharaman said on Thursday that non-bank financial companies (NBFCs) and small finance banks should be cautious while lending. The previous day, RBI governor Shaktikanta Das said these lenders should diversify their sources of funding and not rely too much on bank loans. Mint looks at why the minister and the regulator are cautioning NBFCs.

What are some of the borrowing sources of NBFCs?

Bank credit is the primary source of borrowing for non-bank lenders. It constituted 41.2% of total borrowings as of 31 March 2023, according to data from the RBI. Although this was lower than the 41.4% recorded on 31 December 2022, it was higher than the 39.6% recorded on 31 March 2022.

Market borrowings are the second largest source, accounting for 38.8% of total borrowings in March 2023, down from 41% in March 2022.

Bank loans to NBFCs increased at a compound annual growth rate (CAGR) of 18% in the past five years to 12.3 trillion in September, according to a note by Crisil Ratings. RBI governor Das had earlier highlighted this in his meeting with the heads of large non-bank lenders in August.

How have NBFCs fared on asset quality?

NBFCs saw an improvement in asset quality and capital ratios in the second half of FY23. RBI data showed the capital adequacy ratio of the sector increased 150 basis points to 27.5% between September 2022 and March 2023. The gross non-performing asset (NPA) ratio of NBFCs fell 160 bps to 3.8% in the same period. Moreover, special-mention accounts, or loans on which repayments are delayed but are yet to turn sour, contracted 470 bps in the same period, according to the RBI’s Financial Stability Report.

What is the RBI worried about?

The RBI seems to be cautioning NBFCs and trying to wean them off bank loans to avert contagion in a financial system that is becoming ever more interconnected. NBFCs, Das said, are large net borrowers of funds from the financial system, and have a large exposure to banks.

Banks also subscribe to bonds issued by these NBFCs. A recent report by RBI-promoted economic research institution Centre for Advanced Financial Research and Learning (CAFRAL) said increased integration with the banking sector since the pandemic means close monitoring is needed to prevent systemic issues. The CAFRAL report also said the proliferation of NBFC credit could pose risks to the financial sector, especially as they become more important on a systemic level.

How quickly are NBFCs growing their loan books?

The increase in gross loans in the NBFC sector stood at 16.1% in FY23, higher than the previous fiscal, according to RBI data, mirroring the growth in bank loans. This was led by a surge in personal loans, a segment RBI has now clamped down on by raising capital requirements.

Personal loans from NBFCs rose 31.3% in FY23. While the change in risk weights for consumer loans and on bank credit to NBFCs are expected to dampen demand, they will not drastically affect growth. According to Crisil Ratings, NBFCs are expected to see assets under management grow 16-18% in FY24, and 14-17% in FY25.

However, NBFCs will miss out on some growth areas owing to the recent RBI regulations. Loan sell-downs or direct assignments by personal loan NBFCs could taper at least in the near term, according to ratings agency Icra, following the increase in capital requirements on such loans for the purchasing banks. Icra said the growing financing requirements for NBFCs to meet the demand for consumer and personal loans, and a growing appetite for personal loans by banks had given an impetus to these sales.

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