Non-banking financial companies (NBFCs) are expected to tap the debt market and securitise loans to meet their funding needs going ahead, experts have said.
This comes on the back Reserve Bank of India (RBI)’s rising emphasis on the need for these lenders to diversify their funding sources and reduce their reliance on bank loans.
“Apart from banks, the main source of funding for NBFCs is the capital market, wherein, mutual funds, insurance, pension funds and family offices can subscribe to issuances,” said Sanjay Agarwal, senior director, CareEdge.
“We expect funding from the debt market to increase, especially larger NBFCs, as the rate differential between the capital market and bank loans has reduced in recent months,” he added.
In its latest bulletin, RBI highlighted that the bank loans comprised nearly 46% of the borrowings of upper layer NBFCs. It comprised 31.3% of the borrowings of middle layer NBFCs.
According to latest RBI data, bank loans to NBFCs rose nearly 24% year-on-year as of July.
Apart from direct loans, banks are also one of the key subscribers of debenture issuances and commercial papers of NBFCs.
In addition to reducing their excessive reliance on bank borrowings, RBI also noted that NBFCs need to develop strong governance and risk management standards and be more vigilant about cyber crimes.
“We are likely to see more NBFCs hitting the capital market going ahead,” Parry Singh, founder and chief executive officer, Red Fort Capital said, adding that these lenders may also explore also other funding mechanisms like external commercial borrowings.
Apart from tapping the capital market, experts feel that more NBFCs will securitise their loans in the coming years in order to meet their funding requirements.
“NBFCs may also look to securitisation as a source of funding. These lenders may also eye other sources like SIDBI and NABARD,” a senior official at a leading NBFC said on condition of anonymity.
A recent ICRA report showed that securitisation volumes generated by non-bank lenders and housing finance companies rose 60% year-on-year to 53,000 crore in April-June. The credit rating agency estimates volumes to rise to1.9 trillion in 2023-24 from `1.8 trillion in 2022-23.
In the report, ICRA Senior Vice President and Group Head – Structured Finance Ratings said that the securitisation market will be propelled by an increase in volumes from both existing originators as well as the emergence of new originators.
Securitisation is a process by which certain types of assets are pooled so that they can be repackaged into interest bearing securities.
Typically, mortgage-backed loans are the largest asset class in the asset pool accounting for 30-40% of the overall securitisation volumes, followed by vehicle loans and microfinance loans.
While the benefits of securitisation can be significant, Singh feels that it is important for NBFCs to have a strong understanding of the market and the regulatory requirements before embarking on a transaction.
On the other hand, banks are mandatorily required to allocate 40% of their loan portfolio to the priority sector, which includes NBFCs. However, some banks have been tightening their loans to NBFCs in recent months as they are nearing their sector limits.
In such a scenario, more NBFCs are also expected to enter into co-lending partnerships with banks going ahead as the non-bank lenders can gain access to funding without directly borrowing from banks, say experts.