Notwithstanding higher risk weights, borrowings by non-banking financial companies (NBFC) from banks rose to 22.6% as on March 31, 2024, from 19.8% as on March 2021. NBFC borrowings from banks stood at 21.7% as on March 2023, data from the Reserve Bank of India (RBI)’s Financial Stability Report showed on Thursday.
The exposure of banks to NBFCs witnessed a rise even after the RBI in November 2023 directed banks to increase risk weights on such exposure by 25 percentage points in all cases where the extant risk weight as per external rating of NBFCs is below 100%.
Subsequently, RBI governor Shaktikanta Das warned in a public event that concentrated borrowing linkages between non-bank lenders and mainstream lenders may pose contagion risks. “NBFCs (non-banking financial companies) are large net borrowers of funds from the financial system, with their exposure from the banks being the highest,” Das said.
“Banks are also one of the key subscribers to debentures and commercial papers issued by NBFCs. Needless to state that such concentrated linkages may create a contagion risk,” the governor said.
Debentures subscribed by banks fell to 2.1% of the overall liability mix from 3% as on March 2021, data showed. The share of commercial papers subscribed by banks declined marginally to 0.3% as on March 2023 from 0.4% as on March 2021.
Share capital, reserves and surplus of NBFCs declined during 2023-24 and constituted 28.3% of their total liabilities as on March 2024. Around four-fifths of funds sourced from banks were secured in nature.
Overall, gross advances of NBFCs rose nearly 18% year-on-year (y-o-y) in 2023-24 (April-March) despite some moderation in the second half of the year. Overall advances were fuelled by a growth in personal loans, loans to industry and loans to the agriculture and services segments. Vehicle loans comprised 34.6% of retail loans as on March 31.
With respect to the category of NBFCs by activity, NBFC- Investment and Credit Companies (NBFC-ICC) constitutes 57.7% of the segment. The gross advances of this category rose 24.4% YoY as on March 31 while that of microfinance-focused NBFCs rose 27.4%.
The gross NPA ratio of NBFCs continued to fall in the post-pandemic period to reach 4.0% in March 2024. The capital-to-risky assets ratio stood at 26.6% in March 2024, above the minimum regulatory requirement.