Bank credit to non-banking financial companies (NBFCs) has slowed down after the Reserve Bank of India (RBI) increased risk weights last year. Growth in the banks’ loan to NBFCs declined to a two-year low of 8.5% in June, down from 36% in October 2022, according to the RBI data.
Concerned by the sharp increase in bank loans to NBFCs, the RBI raised the risk weights on such loans by 25 basis points in November last year, which in turn increased the cost of funds for these shadow lenders. “The main reason for the slowdown in banks’ credit growth is the RBI’s decision to raise risk weights on loans to NBFCs, making borrowing from banks more expensive,” Raman Aggarwal, director, Finance Industry Development Council (FIDC), told FE.
Banks credit to NBFCs reached Rs 12.2 lakh crore at the end of October 2022, registering a year-on-year growth of 36%. This growth moderated to some extent in 2023 but remained above 20% until October 2023. However, it started declining after the RBI hiked risk weights by 25 basis points to 125%.The move was aimed at reducing the dependence of NBFCs on bank borrowings. With the RBI asking shadow banks to diversify their source of funding, NBFCs have started to looking at increasing alternate sources of funds. “NBFCs are now reaching out to private credit players and increasing share of external commercial borrowing,” said a chief financial officer of an NBFC.
While larger NBFCs are looking to increase the share of borrowing from overseas, midsize and smaller peers are approaching private credit firms to diversify their borrowing programme. L&T Finance is planning to increase the share of foreign currency borrowings, including ECBs, which is currently below less than 5%, to 7-10% in the medium term. Similarly, Piramal Capital and Housing Finance is looking to raise the share of overseas borrowing to 10-15% of its total liabilities in the next two to three years from 4% currently.