NBFCs must further lower reliance on bank borrowings, RBI report says
Even as the dependence of non-banking finance companies (NBFCs) on bank loans has moderated slightly post hike in risk weights, the sector’s reliance on funding from banks continues to remain high and shadow lenders must diversify their sources of funds as a risk mitigation strategy, a report from the Reserve Bank of India stated.
“The dependence of NBFCs on banks remain high, notwithstanding some moderation; NBFCs need to further diversify their sources of funds as a risk mitigation strategy. An imprudent ‘growth at any cost’ approach would be counter-productive, and a robust risk management framework should be implemented,” the report on FY24 trends and progress in banking noted. Businessline had reported in October that the regulator had asked NBFCs, especially upper layer ones, to maintain 25 per cent of their liabilities from capital markets.
During FY24 the balance sheet of NBFCs expanded in double digits to 16.3 per cent as compared with 17.2 per cent in the preceding year, the report stated.
On the liability side, NBFCs’ borrowings from banks decelerated, while funds raised through debentures picked up, reflecting the impact of higher risk-weights. The NBFCs also relied on securitisation to raise funds. On the asset side, growth in loans accelerated to 18.5 per cent in FY24 from 17.4 per cent in FY23, driven by upper layer NBFCs. Meanwhile, middle layer NBFCs saw relatively muted growth on account of contraction in unsecured loans.
Vehicle loans, gold loans and microfinance loans remained the stronghold of NBFCs, accounting for 56.7 per cent of their retail portfolio at end-March 2024. Vehicle loans in particular remain the largest component of NBFCs’ retail loan portfolio, with a share of 34.7 per cent at March-end.
Vigilance needed
The RBI report noted while the share of special mention accounts-2 (SMA) has come down, NBFCs must be vigilant about the rise in the shares of SMA-0 and SMA-1 accounts in FY24. Lenders categorise stressed loans under SMA categories. Loans under SMA-O category are overdue for up to 30 days, SMA-1 highlights loans unpaid for more than 30 days but less than 60 days, while SMA-2 shows payments overdue between 61-90 days. An account is classified as non-performing if repayment is overdue for over 90 days.
Separately, the RBI has cancelled the registration certificate of 143 NBFCs due to voluntary surrender of license, violation of guidelines including those related to data confidentiality and security of customer information, code of conduct in outsourcing of financial services and the fair practices code.
“Going forward, besides the challenges emanating from cybersecurity threats, NBFCs need to be mindful of the evolving concentration risk and climate-related financial risks associated with credit to certain sectors,” the report said.
“Moreover, they need to strengthen their initiatives to address customer grievances, adhere to fair practices and avoid recourse to usurious interest rates so as to ensure their relevance in a fast-changing financial landscape,” it added.