Transmission of repo rate changes to non-banking financial companies (NBFCs) continues to be slow and uneven, even as many lenders steadily reduce their dependence on bank borrowings by tapping bond markets and other funding sources, according to industry executives and analysts.
Umesh Revankar, executive vice-chairman of Shriram Finance, said around 50% of the cumulative policy rate changes have so far been transmitted to NBFCs. “Typically, transmission to NBFCs takes about three to six months,” he said, adding that the pace depends on funding mix and market conditions. In contrast, Pinank Shah, chief executive officer of Capital India Finance, said full transmission can take up to 12 months for many lenders.
Market participants say larger, well-rated NBFCs are benefiting faster as they increasingly access bond markets when bank lending rates remain elevated. This shift has also created competitive pressure on banks. “When large NBFCs move to market borrowings, banks respond by cutting spreads by around 20–30 basis points to retain business,” a senior official said. Funding constraints typically emerge only when there are concerns around demand or asset quality, he added.
Why large NBFCs are winning the funding race
Liquidity conditions remain a key determinant. “In a tight liquidity environment banks get selective and focus on high rated borrowers for credit growth,” Sachin Sachdeva, vice president-Financial Sector Ratings at ICRA said. As a result, smaller and lower-rated NBFCs face higher and more persistent borrowing costs.
Regulatory changes have provided some relief at the margin. Sanjay Agarwal, senior director at CARE Ratings said the removal of higher risk weights on bank lending to NBFCs has made banks more willing to lend to mid-sized and small NBFCs. “They are able to negotiate slightly better rates, but transmission is still happening very slowly,” he said.
Bank lending to NBFCs has gathered pace since the rollback of higher risk weights in February, RBI sectoral deployment data shows. After remaining largely flat through the early part of the year, credit growth turned decisively positive in the second half, reflecting improved bank appetite. Outstanding bank credit to NBFCs rose to Rs 17.04 lakh crore in October, up 10.9% year-on-year and 7.2% month-on-month, marking the strongest expansion in recent months and signalling easing funding conditions for the sector.
Analysts say the gradual diversification of funding sources has improved the bargaining power and resilience of stronger NBFCs, but has not eliminated structural frictions in monetary transmission. Risk perception, liquidity conditions and investor appetite continue to influence the speed and extent of pass-through.
These observations are reflected in an RBI paper on the performance of the NBFC sector, which notes that while NBFCs have gained importance in credit intermediation and monetary transmission, their dependence on bank and market borrowings makes the process more indirect than for banks.
Quantitative Reality
Using data from the top 100 NBFCs by asset size between March 2019 and December 2024, the RBI found that a one percentage point change in the repo rate led to a 24 bps change in NBFCs’ weighted average borrowing rate over three quarters, indicating incomplete pass-through. Larger and more profitable NBFCs were able to borrow at lower rates, highlighting the role of scale and balance sheet strength.
On the lending side, a one percentage point change in the repo rate translated into a 33 bps change in NBFCs’ weighted average lending rate over the same period. The RBI noted that higher funding costs and the relatively riskier borrower segments served by NBFCs limit the extent to which lending rates can be adjusted.
Overall, while funding diversification and regulatory easing have improved conditions for parts of the NBFC sector, repo rate transmission remains partial, with benefits accruing faster to larger, better-rated lenders than to smaller peers.