The Reserve Bank of India (RBI) released a study emphasizing the importance, for Nonbanking financial companies (NBFCs) to diversify their funding sources and reduce reliance on traditional banking channels. The study was featured in the September 2023 bulletin of the RBI. Highlights the need for development as NBFCs aim for robust growth in their loan portfolios while maintaining high asset quality and capital positions.
The study categorizes NBFCs into four groups based on size, activity and perceived risk level implementing a scale-based framework since October 1 2022. It revealed that NBFCs in the layer (NBFCs UL) have significantly increased their dependence on bank borrowings accounting for almost half of their total borrowings by December 2022. This trend is attributed to the prevailing low interest environment and delays in monetary policy transmission.
Interestingly while secured borrowings are predominantly used by NBFC ULs unsecured means are notably employed by NBFCs in the layers (NBFC MLs) among large government owned NBFCs where, over two thirds of their borrowings are unsecured.
The report also provides insights, into the lending practices in the NBFC industry. Government owned NBFCs primarily lend to infrastructure companies while owned entities mainly focus on businesses. This shows that NBFC operations have a landscape.
It’s encouraging to note that as the economy continues to recover the non-performing assets (NPAs) of the NBFC sector have decreased as a percentage of loans. This decline can be attributed to fewer new NPAs being added and improved efforts in recovering existing ones. The gross non-performing assets (NPAs) decreased from 5.4% in March 2022 to 4.9% in December 2022. Net NPAs reduced from 2.4% to 1.9% during the same period.
Furthermore, the study also highlights that NBFCs have maintained capital positions and ample buffers with a capital adequacy ratio (CAR) of 25.8% as of December 2022 well above the regulatory requirement of 15%.
This study emphasizes how important it is for NBFCs to engage in planning and diversification strategies. These measures ensure that they remain resilient, adaptable and well prepared for growth, in India’s changing economic landscape.