In the first half of the current financial year, the loan growth of non-banking financial companies (NBFCs) moderated to 6.5%, according to the latest Reserve Bank of India’s Financial Stability Report.
The primary reason attributed to the moderation was increase in risk weights on NBFC lending to certain consumer credit categories as well as on bank lending to NBFCs.
In November 2023, the RBI increased the risk weights for loans to NBFCs by 25 basis points. The risk weight for retail loans increased from 100% to 125%. It was applicable to all retail loans, except for housing, education, vehicle, and microfinance/self-help group loans.
At the same time, the risk weight for bank loans increased for NBFCs rated AAA, AA, and A. For example, the risk weight for an AAA-rated NBFC increased from 20% to 45%.
The increase of risk weight measures directly impacted the lending of upper-layer NBFCs, the report mentioned. Around 63.8% of loan portfolio of upper-layer NBFCs belongs to retail loan, thereby impacting them on a large scale. Whereas, middle-layer NBFCs, excluding government-owned NBFCs, maintained robust loan growth, especially in retail loan portfolios, the report highlighted.
At the same time, growth of bank borrowings in NBFC liabilities fell to 17% from 26% year-on-year. Consequently, NBFCs’ increasing reliance on non-bank sources raised the cost of funding. In order to diversify the source of funding, NBFCs have increased borrowings offshore to contain overall costs. However, this may pose currency risks to these NBFCs as these were unhedged.
Overall, the NBFC sector remains healthy with sizable capital buffers with capital to risk weighted capital ratio (CRAR) at 26.1% in September 2024. Interest margins and earnings showed robust growth, with net interest margin at 5.1% and return on assets at 2.9%. Another key feature, which highlighted healthy growth in the NBFC sector is improvement in asset quality.
Industry gross non-performing assets (GNPA) stands at 3.4% of gross loans and advances. Write-offs, however, show a rising trend, with a few outlier NBFCs showing significantly higher writeoffs, the report said.
“While risks from global spillovers remain, the Indian financial system, supported by further improvement in balance sheet of banks and NBFCs, and strong buffers, is expected to remain sound and vibrant,” RBI governor Sanjay Malhotra said in the summary and outlook of the report.
