Systemic risk identification and monitoring among non-banking financial companies (NBFC) is a challenge considering the significant heterogeneity within the segment, the RBI said in its latest Financial Stability Report.
NBFC-investment and credit companies (NBFC-ICCs), and NBFC infrastructure finance companies (NBFC-IFCs) account for 95% of the NBFC segment’s advances.RBI notes that the balance sheets of these two categories of NBFCs present different risk profiles. While NBFC-ICCs focus on retail lending, NBFC-IFCs largely lend to the industrial sector.
Between September 2021 and September 2023, retail lending by NBFCs grew at a compound annual growth rate of 25.2%, higher than the 15.7% rise in gross credit. As the end of September 2023, NBFC-ICCs’ share was 90.1% of total retail credit, with microfinance-focused NBFCs accounted for the remaining 9.9%.
Consumer loans formed 44.7% of the incremental retail loan growth over the last one year. The share of unsecured loans in the NBFC sector rose to 31.9% as on September 2023 from 24.6% as on March 2020.
Recently, RBI has increased the risk weights on bank and NBFC exposure to consumer credit, which is expected to impact disbursements in this segment.
On the other hand, NBFC-IFCs had a share of 75.1% in gross industrial credit by the NBFC sector, with the top ten sectors accounting for 83% of their large loans. Here, NBFC-IFCs are particularly sensitive to developments in the power sector, which forms two-third of the large exposures of these lenders.
Specifically, the report notes that the sizeable overdues of power distribution companies could add to the stress of electricity companies. At the same time, the report highlighted that these NBFCs have a significant dependence on bank borrowings. Borrowings from banks constitute 41.1% of total borrowings of non-bank lenders.
Here, the share of borrowing for NBFC-ICCs is higher than NBFC-IFCs. The growing interconnectedness between banks and NBFCs through the funding route and idiosyncratic risks posed by different types of NBFCs could potentially increase contagion risk for banks, the report said.