With loans from banks slowing, non-banking financial companies (NBFCs) are increasingly attempting to access alternative funding sources, such as non-convertible debentures (NCD), commercial papers (CP), foreign currency borrowings (FCB) and securitisation, to continue their growth march. There have been challenges in availability of bank loans as freely as in the past after risk weights on bank lending to higher-rated NBFCs were raised last year.
CRISIL Ratings studies over 110 NBFCs, which account for >95 per cent of the sector’s assets under management (AUM) to indicate that the share of bank loans in the sector’s borrowings declined by approximately 60 basis points (bps) to 47.0 per cent in the quarter through June 30, 2024. The drop is more for the ‘A and below’ category rated players compared with those in the ‘AAA’ and ‘AA’ categories, it said.
Malvika Bhotika, Director, CRISIL Ratings, said, “While banks will remain the dominant funding source for NBFCs, the bond market will gain market share over the near to medium term. In fact, the share of NCDs in the sector’s borrowings rose ~30 bps to 28.5 per cent in June quarter, in line with the ‘AAA’ and ‘AA’ category rated entities. Those rated in the ‘A and below’ categories are attempting to tap the market too, as the share of NCDs in their overall borrowings is up ~40 bps during the quarter, but on a much smaller base. We believe the bond market will become more attractive over the next few quarters given the expectation of a repo rate cut.”
Issuances by NBFCs, CRISIL added, will also be supported by improved investor confidence because of stronger balance sheets and healthy liquidity, with most maintaining liquidity coverage ratio way higher than the regulatory requirement.
Per the CRISIL report, over the near to medium term, in order to facilitate their growth trajectory, NBFCs will be required to continue with funding diversification across resource types. Diversification is also crucial to optimise borrowing cost, given bank funding has become dearer by 20-50 bps over the past few quarters. That means NBFCs will have to keep tapping other funding avenues, including CPs, FCBs and securitisation, which together accounted for 16.1 per cent of the sector’s borrowings as of June 2024, it added.
The momentum in CP issuances by NBFCs has picked up in recent quarters with overall volume reaching levels seen almost 5 years back. Outstanding investments by mutual funds, one of the largest investors in such CPs, touched a six-year high in July 2024. On the other hand, securitisation volume rose to Rs 1.9 lakh crore in fiscal 2024.
Rounak Agarwal, Associate Director, CRISIL Ratings, said, “Securitisation will continue to be one of the preferred alternative routes of NBFCs to raise funds. Interestingly, NBFC issuers in the ‘A and below’ rating categories have been able to partially offset the decline in their share of bank borrowings through securitisation — the share of which rose ~30 bps in the June quarter. On the other hand, the ‘AAA’ and ‘AA’ categories rated issuers have relied more on FCBs, helped by lower hedging costs. To be sure, the share of FCBs in their overall borrowings rose ~50 bps to 5.3 per cent during the period.”
Going forward, NBFCs are expected to maintain diversity in their funding resource mix, said CRISIL Ratings, while maintaining that any regulatory developments having an impact on their resource-raising ability, which affects their overall resource mix, will bear watching.